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Gold Price Poised to Knock Out Another 7-Year High: 3 Reasons Why

Last Updated September 23, 2020 1:31 PM
Sam Bourgi
Last Updated September 23, 2020 1:31 PM
  • The price of gold rallied 0.9% to $1,590.70/oz. on Thursday, the highest in three weeks.
  • A combination of technical and fundamental forces has bullion hitting new seven-year highs this quarter.
  • Inflows into gold exchange-traded funds (ETFs) have already hit seven-year peaks.

The price of gold rallied sharply on Thursday, as coronavirus fears overshadowed economic data, corporate earnings and even the Fed.

April gold futures jumped $14.70, or 0.9%, to $1,590.70 a troy ounce on the Comex division of the New York Mercantile Exchange. The yellow metal remains about $29 shy of its most recent seven-year peak.

Gold bullion price
Gold for April settlement peaked north of $1,590/oz. Thursday. The yellow metal is up 4.3% year-to-date. | Chart: barchart.com 

Bullion is outperforming the U.S. stock market this month. There are at least three reasons why the precious metal is likely to extend its rally for the remainder of the quarter.

The Spread of Coronavirus

The renewed urgency to buy gold follows a worsening coronavirus outbreak that has infected thousands of people across at least 19 countries. After initial hesitation, the World Health Organization (WHO) has officially declared the coronavirus outbreak to be a global public health emergency .

Infections in China  alone have topped 8,100, already surpassing the worldwide cases of SARS back in 2003 .

In addition to the human toll, the spread of coronavirus has major implications on the economic health of nations and regions. Even the Federal Reserve’s Chairman Jerome Powell commented Wednesday that coronavirus is likely to cause “some disruption of activity in China and probably globally.”

The flight to safety has been accompanied by sharp declines in global equity markets. Following a brief pause, stock prices are plunging again over fears of global pandemic. In an environment dominated by risk-off sentiment, gold and other safe havens are likely to rise in value.

Technical Breakouts Eyed

Gold’s rapid ascent is also being aided by technical traders who see renewed opportunity in longing the precious metal. As AG Thorson of FXEmpire noted Thursday, gold still has a ways to go before the current six-month cycle peaks .

The analyst believes prices are only now breaking out from a mid-cycle consolidation, which puts $1,700 on the immediate horizon. Bullion has already pushed north of the 10-period moving average, giving it a bullish bias over the short term. A takeout of $1,600 leaves the seven-year peak of $1,619.60 exposed.

ETF Inflows Surge

Demand for bullion is also being reflected in the multi-trillion-dollar ETF market. 2019 marked the fourth consecutive year of net inflows into gold-backed ETFs. As Bloomberg reports , the amount of money held in these funds now sits at seven-year highs.

Bloomberg analyst Ranjeetha Pakiam said it’s not just coronavirus driving the gains. The Federal Reserve’s decision to lower interest rates and keep them anchored well below the historic average has also boosted the appeal of the precious metal. As a non-yielding asset, gold is an attractive investment when interest rates are low.

Although the Fed has signaled that rates are likely to remain stable for the balance of 2020, there’s reason to believe its next move will be to lower them. Already today, futures traders are pricing in at least one rate cut after September, according to CME Group’s FedWatch tool.

Fed fund futures
Despite what the Fed says, futures traders are pricing in more rate cuts by the end of the year. | Chart: CME Group 

Beyond the Fed, central banks around the world are lowering interest rates and introducing new easing measures to revive economic growth and inflation. Central banks cut interest rates a total of 66 times in 2019. Further easing is likely on the way as China and emerging markets continue to slow.

Disclaimer: The above should not be considered trading advice from CCN.com.