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Gold Price Just Smashed 3-Month Highs: 3 Reasons Why

Last Updated September 23, 2020 1:26 PM
Sam Bourgi
Last Updated September 23, 2020 1:26 PM
  • Gold peaked at more than three-month highs on Friday and looks poised to end 2019 on a positive note.
  • Bullion is on track for its best yearly return since 2010.
  • At least three underlying factors have supported the yellow metal over the past few weeks.

The price of gold ended the week on a high note Friday, as seasonal influences and political headlines pushed investors into the traditional haven asset. Somewhat surprisingly, gold is rallying while stocks are at all-time highs, sending a strong signal that investors are becoming weary of the decade-long bull market.

February gold futures climbed $3.70, or 0.2%, to $1,518.10 a troy ounce on Friday, the highest since Sept. 24.


February gold futures
Gold for February settlement finished at three-month highs on the Comex division of the New York Mercantile Exchange. | Chart: Bloomberg 

Bullion is rounding out its best year since 2010, having returned 18.5% so far. The price is still down 3.4% from its early September peak.

Here are three reasons why gold is going up along with stocks and why it could continue in 2020.

Low Real Interest Rates

The Federal Reserve capitulated to President Trump in the second half of the year as policymakers voted to lower interest rates three times. Although the third rate cut was viewed as more hawkish than the previous two, the U.S. central bank had all but abandoned its pledge to normalize monetary policy.

Low interest rates are usually a recipe for higher inflation (whether that inflation is accurately reflected in the flawed consumer price baskets or not). With some official measures of inflation exceeding interest rates, gold has plenty of room to continue rising.

The benchmark 10-year U.S. Treasury yield closed Friday trading at 1.878%. The last reading of the consumer price index (CPI) in November  was 2.1%.

10 year Treasury yield
The benchmark 10-year Treasury yield, a major mover for domestic and global interest rates, has been in firm retreat all year long. | Chart: CNBC 

Major Risks on the Horizon

2019 was a year where equities outshined other asset classes thanks to an accomodative Fed and positive news surrounding U.S.-China trade talks. But there are still plenty of risks keeping strategists up at night.

Morgan Stanley has cited ten macro risks that could disrupt the decade-long bull market as early as next year. Mostly geopolitical in nature, Morgan Stanley said leadership races in the West, the emergence of competing trade blocs and China’s political economy were at the top of the list.

Even as some traders brush off U.S.-China trade tensions, it’s apparent that both sides aren’t even close to finalizing a comprehensive agreement. The same grievances Donald Trump conveyed while campaigning for president still haven’t been resolved. Issues like technology transfers, intellectual property and Chinese industrial policy remain the most contentious issues that could block the formation of a meaningful trade agreement between the two countries.

If geopolitical flare-ups in the Middle East, South America and Europe become material risks, expect to see more investors flock to gold.

Technical Positioning

Gold achieved a significant milestone earlier this week by reclaiming $1,500 in convincing fashion. The yellow metal has developed a “more bullish near-term technical posture” that could open the door to further gains, according to Kitco analyst Jim Wyckoff .

As a result of the uptrend, bullion has established a new trading range between $1,480 and $1,530, RBC Wealth Management director George Gero told Kitco. Combined with a weaker dollar that is only expected to erode further in 2020 and gold has brighter prospects heading into next year.

Gold still needs to break out of its current range to formulate a new offensive that takes down September’s multi-year high. The chance of that happening grows insofar as the price maintains levels of $1,500 and above.

As the need for diversification grows due to overvalued stocks, gold could be in prime position to capitalize. The technical picture suggests the commodity is already benefiting from higher capital flows.