Precious metals have done phenomenally well this year and, while our technical analysis below focuses on gold, we highlight that other precious metals have also outperformed in 2020. Silver, for example, traded above the $19/oz key resistance level at the start of July after a stellar 2Q20 performance on the back of higher industrial demand expectations and, much like gold, its safe-haven appeal.
From a fundamental analysis perspective, gold has always been regarded as a safe-haven asset, meaning that it is not correlated to the economy as a whole and can instead maintain or even increase in value during periods of high market volatility such as we have been experiencing this year. Renowned investor, Warren Buffet once referred to gold as “a way of going long on fear.” In addition, gold has historically been a great inflation hedge, although we note that currently deflation may be a greater risk globally than inflation. With global interest rates at zero or even negative, there is a real case to be made for holding gold as a tactical alternative investment in the current environment.
Over the past two months investors have been buying bullion on the back of mounting concerns surrounding surging COVID-19 cases in the US and fears around renewed tensions between the US and China. This has seen the price of gold reaching new highs and, on 24 July, the yellow metal broke through $1,900/oz – a level last seen in August 2011. On Tuesday (28 July), the gold price reached another new all-time high, trading above $1,980/oz before falling back to around $1,955/oz as market action was subdued ahead of the US Federal Reserve Open Market Committee (FOMC) monetary policy announcements. The FOMC met on 28 and 29 July for the first time since the resurgence (from around mid-June) of COVID-19 cases across large swathes of the US. But, in a break from tradition, where announcements are made at the conclusion of the two-day meeting, the Federal Reserve (Fed) opted to announce on Tuesday that it was extending its lending programmes, scheduled to end on 30 September, to the end of this year.
This development weighed on the dollar (although it recovered later in the day), and saw the gold price trading at an all-time high on 29 July, important from a technical perspective that, on a weekly close, gold remained above the $1,900/oz level. While the Fed’s announcement may have an impact on the price of gold in the near term, it appears that a solid base is in place and the potential for a cup and handle pattern is forming. There are also some strong horizontal support levels for gold at around the $1,800/oz and $1,575/oz mark. The latest daily gold price technical chart shows us that the recent surge in the price has been astronomical and we would expect some consolidation in the short term. However, a close below $1,800/oz would negate this argument and we would advise caution in the event of this happening.
The US Dollar Index
The US Dollar Index is used to measure the value of the dollar against a basket of six global currencies that includes the euro (with a 57.6% weighting), the Swiss franc (3.6% weighting), Japanese yen (13.6% weighting), Canadian dollar (9.1% weighting), the British pound (11.9% weighting), and the Swedish krona (4.2% weighting). The euro’s appreciation or depreciation against the US dollar has a material impact on the index.
Looking at the US Dollar Index, it is clear that the recent flare-up in US-China tensions, the upcoming US elections, enormous stimulus packages by various government and the increase in COVID-19 cases seem to have cast a dark cloud over the US dollar as a favoured global currency, from a fundamental analysis perspective. The index fell to a two-year low on Monday (27 July), losing ground to its major rivals. We note that the US Dollar Index has retraced from the 102.50 level and is fast approaching support at around 92.50. We think it is likely that the index could become range bound with horizontal support at around the 88.50 level. The short-term focus will be the announcements that came out of the Fed meeting and concerns around the US elections in November.