E The End Of The Gold Rush?

When the price of gold surpassed $2,000 USD per ounce in August 2020, it was revered as a key milestone for the precious metal. Commentators began questioning whether the $2,000 price mark that traditionally acted as a level of resistance would soon become the new support level. Such optimism was due to the fact that investors and traders were buying into gold to reduce their risk exposure and manage the market volatility caused by COVID-19.

Over the course of 2020, I commented extensively on gold’s price movements. Based on my initial observations, it was clear to me that gold had not lost its shine as a safe haven asset. The market was confident the asset could hold its value in the long-term – an appealing factor, considering the bear market trends and rising inflation that investors had to contend with.

By the end of the year, the price of gold had risen by 25%. What’s more, Goldman Sachs projected the gold price to reach around $2,300 in 2021. Despite this bullish outlook, the prospects for gold does not look as positive – the price per ounce is currently sitting around $1700.

In fact, there is reason to believe that the buyer momentum responsible for the so-called ‘2020 gold rush’ is waning as investors look to other assets. I believe this is partly being driven by the performance of the USD – I explain why below.

The USD headwind

One could argue that part of the reason why gold reached record highs was due to the depreciation of the USD. In December 2020, the reserve currency index reached its lowest point since April 2018 – a consequence of low-interest rates and intervention from the Federal Reserve to overcome the financial challenges posed by COVID. However, it now looks as though the USD is consolidating its position and set for a recovery, which will negatively impact the gold price.

Generally speaking, when the value of the USD increases relative to other major global currencies, the price of gold is likely to fall. The reason for this is simple – as the price of gold is linked to the USD, a rise in the dollar value makes the commodity more expensive. As a consequence, the demand is then likely to drop due to there being fewer buyers on the market. On the other hand, if the USD depreciates, it becomes cheaper to buy in other currencies.

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Disclosure: Giles Coghlan is Chief Currency Analyst, HYCM – an online provider of ...

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