By Ricardo Evangelista
AUGUST 2020 was a remarkable month for gold traders, with the price of the precious metal reaching an all-time high of more than $2000 per ounce. The spectacular rise in the price of bullion coincided with moments of uncertainty in global financial markets, as the coronavirus caused the most pronounced slowdown in the planet’s economic activity since World War II. Since then, thanks to successful vaccination plans and, despite some lingering concerns over the spreading of new variants, especially in Asia, the economic outlook improved considerably.
So far this year, demand for the precious metal decreased and trading has occurred within a narrower range than in 2020, with the price dropping approximately 6.5 percent since early January. In the run-up to year-end the performance of gold is likely to remain under the influence of two main factors: the performance of the US dollar and the level of risk appetite in global financial markets.
There is an inverted correlation between gold (which is priced in dollars) and the American currency, with the precious metal suffering losses every time the greenback rises and gaining whenever the opposite occurs. Recently, the outlook for the American currency has improved; the economic recovery in the US triggered inflation related fears, forcing the Federal Reserve to adopt a more hawkish posture that offered support to the dollar, as investors started pricing in the likelihood of an earlier tapering of the central bank’s asset purchase programme, and even the beginning of the discussion on the timing for interest rate hikes. So, as the dollar climbed, gold suffered losses, which could increase should economic data in the US continue to surprise to the upside.
On the other hand, gold is the ultimate refuge asset, one that always rises when the global economic outlook deteriorates – which is what happened in August 2020. At the moment there are some reasons for concern among investors, mainly due to rising numbers of cases of the Delta variant of the virus, which forced the authorities of several Asia-Pacific nations to impose fresh lockdowns. This scenario, together with growing geo-political instability, triggered a spell of risk aversion in the financial markets over the last few days, offering support to gold.
Considering the present scenario, gold could suffer losses as we approach the end of the year, if fears over the growth of the global economy dissipate and, above all, if the hawkish pivot of the Fed materialises and the US dollar reaches for fresh multi-month highs.
However, it is also possible that the economic recovery will slow down in the US, forcing the Fed to keep the current levels of stimulus for longer, which would create downside risk for the dollar and therefore support gold. This scenario could be exacerbated by a deterioration of the situation in Asia, due to the return of the virus, which would increase the appetite for the safe haven gold.
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