Commodities and financial advisory firm CPM Group managing partner Jeff Christian says the currently high trading gold price is likely to remain near the $1 900/oz mark in the near term as political and economic uncertainty remain high, especially within the US.
As at August 5, the gold price was above the $2 000/oz mark, having risen sharply from about mid-July when it was trending in the lower $1 800/oz range and from just below the upper $1 900/oz range as of August 3.
CPM issued a trade recommendation on August 3 saying that it thought the gold price would stay high during the next several weeks and months simply because of the tremendous amount of political and financial market uncertainty that is clouding the immediate future currently.
“Things are getting very weird economically and politically,” Christian says, adding that there have been recent arguments held in the US Congress about the next round of stimulus to protect the US economy from further deterioration, thereby creating uncertainty.
Christian notes that economies are in bad shape despite “some good numbers” coming out of them and that the Covid-19 pandemic is worsening in the US – a situation exacerbated by infighting of the US government.
“It is a precarious time and this is set to keep the gold price relatively well supported.”
In addition to this, he says there are efforts by regulators and banks to quell what they see as speculative excess buying over the past two weeks and that this action could add a bit of moderating pressure to the gold price.
In this kind of trading environment, Christian says CPM’s trade recommendation is in line with a gold price trending down over the next week or so, probably in the $1 960/oz range for the December contract. “A spike down to $1 950/oz or $1 930/oz even could also not be ruled out.”
However, he says a lower trending value would be temporary and taken as a “buying opportunity” by bullish traders to push the price higher based on the exogenous economic and political factors.
Fuelling uncertainty, especially in the US markets is the fact that the country is less than three months away from the US elections, which Christian says will be highly contested.
Meanwhile, he reiterates market commentary issued by CPM that delves into any potential correlation between gold, the dollar and interest rates, as some in the trading industry sought to draw comparisons between a rise in gold prices and a depreciation in the dollar.
“We saw the dollar weaken a little bit, about 2.2% last week. That prompted many people to say the dollar is going to fall sharply. However, while the dollar did weaken a little, it gained back about a third to a half of that [on August 3],” he says.
Christian explains that while the dollar did weaken a little on a short term basis, the reality is that the dollar is high by historical standards and is higher than it has been for most of the time since the global financial crisis in 2008/9.
“The dollar is far from collapsing and this is not necessarily a problem for gold as it does not trade against the dollar and instead trades against currencies.”
He says that what is happening now is that gold and the dollar are reacting to the same third-party independent variables, so when the dollar rises the gold price might rise if whatever is driving the dollar up is also driving gold prices higher. “It is not uncommon to see gold and the dollar rise and fall together.”
“The statistical correlation of change in real gold prices versus real exchange rates is about -34% in the half century of free gold prices. This means that 66% of the time the prices are either moving together or they are not moving in any correlated fashion at all,” says Christian.
Therefore, he says a higher gold price is not necessarily negative for gold and a weaker dollar is not necessarily positive for gold either.
“What is happening right now is that gold is has actually been high over the past few weeks and there has been some short-term profit-taking.”