The gold price dropped by 1.75% in the past three days despite bullish short-term forecasts. The safe-haven asset’s fall amidst intensifying geopolitical risks portray the strength of the current stock market rally.
Up until December 4, the gold price was seemingly ready to break out above a key resistance level at $1,484. It was rejected again at a lower time frame resistance level, leaving it vulnerable for a pullback.
Big downswings in stock market should benefit gold, but it’s not
Throughout this week, the U.S. stock market has demonstrated extreme volatility. The Dow Jones recorded three 300-point days on December 2, 3 and 6, falling to the 27,300 region at the week’s lowest point.
The tremble in the U.S. stock market was caused by the likelihood of trade discussions between the U.S. and China resetting by the year’s end. The market’s expectations of a phase one deal by December started to turn sour as a consequence.
Up until early last week, gold was noticeably rallying off of growing uncertainties in both the U.S. and global stock market.
Gold has had all major factors to sustain its positive momentum; the stock market has consistently shown instability while the accumulation of gold increased.
The strong upside movement of gold led to optimistic projections, especially as central banks continue to purchase the precious metal to rebalance currency reserves.
Yet, the accommodating stance of the Federal Reserve, record low unemployment rates, and growing investments into the U.S. by major local conglomerates prevented a larger gold recovery.
Central banks are stacking gold, no impact on price
According to Mike McGlone, senior commodity strategist at Bloomberg Intelligence, net purchases of gold by central banks hit a decade high, surpassing 2013.
Accelerated purchases by central banks are unlikely to end, limiting gold-price downside. A record-high greenback is part of the reduced dollar exposure or diversification and rebalancing of currency reserves. Banks haven't absorbed well over 20% of #gold supply since Nixon pic.twitter.com/yPjnvrouWv
— Mike McGlone (@mikemcglone11) December 5, 2019
With the lead of the U.S. and Europe, central banks across the global market have all started to introduce various stimuli to ease the impact of geopolitical tension on financial markets.
The majority of banks, however, have struggled to balance the stimuli with long-term stability, leading to larger purchases of the metal.
Gold is like insurance for governments and central banks. When the financial system becomes increasingly unstable, the safe haven asset can act as the basis for a rebuild.
A roughly translated report from the Central Bank of Netherlands reads:
If the entire system collapses, the gold stock provides a collateral to start over. Gold gives confidence in the power of the central bank’s balance sheet. That gives a safe feeling.
Good sign for stock market?
The inability of gold to sustain its momentum in spite of rising purchases of gold by institutions over the past 11 months suggests that the stock market has room to rally even further in the short to medium-term.
Gold has increased substantially from January as it strongly rebounded from its slump in the second quarter. Still, it is at risk of ending the year with a gloomy sentiment and eerie predictions for a correction heading into 2020.