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Gold pulls back after hitting new highs

Issac John /Dubai
issacjohn@khaleejtimes.com Filed on July 28, 2020

(AFP)

After seven consecutive days of winning streak, gold on Tuesday witnessed a dramatic intra-day turnaround from an all-time high of $1981 per ounce to settle at fresh lows, with bears now eyeing a break below the $1,900 mark.

Spot gold touched $1,981.27 on Tuesday, about $60 above the previous peak of $1,921 set in 2011, boosted by a drop in real rates, the recent weakness in the dollar, massive government stimulus and flaring US-China tensions.

Analysts said that given the recent strong rally of over $180 since July 17 swing lows, investors also seemed inclined to take some profits. This, in turn, triggered some aggressive long-unwinding trade and took along trading stops placed near the overnight swing high, around the $1946 region.

Prices are likely to continue their upward journey as investors know that the gold has broken significant resistance. This resistance level, formed in 2011, reached an all-time high at $1921. As of today, the gold price is trading at $1,943 and has reached as far as $1,981. The gold price is up nearly 28 per cent.

Goldman strategist Daniel Sharp said that the yellow metal's record-breaking rally highlights growing conern over the world economy. The bank raised its 12-month forecast for gold to $2,300 an ounce from $2,000 an ounce previously.

"Real concerns around the longevity of the US dollar as a reserve currency have started to emerge," wrote Sharp. "Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows."

According to Ken Hoffman, senior expert at McKinsey, confidence in the yellow metal signals to investors a desire to break away from the U.S. dollar. "The world is trying to get away from the dollar. You've seen a number of Chinese sources talk about the 'de-dollarization' and as the world tries to look for another currency besides the dollar, gold makes a lot of sense," said Hoffman.

Georgette Boele, strategist at ABN Amro, said gold has just smashed a record, and every major bank agrees that it'll cross $2,000 an ounce.  

JPMorgan Chase & Co. said that the rally which has already seen prices rise by 27 per cent in 2020 could start to lose steam later this year. Goldman Sachs Group Inc, Citigroup Inc and Bank of America Corp aren't ready to call it quits just yet, with the latter seeing the metal soaring to as high as $3,000 an ounce.

BofA analysts sounded more bullish, sticking to their April forecast for $3,000-an-ounce gold over the next 18 months. Citigroup said the current gold cycle is "unique" and prices can "stay in a higher range for longer."

Most analysts are of the view that gold has emerged as the safe haven of choice among investors as the pandemic upends economies worldwide. Gold is serving as an attractive hedge as yields on Treasuries that strip out the effects of inflation fall below zero.

There's still a little bit further to go for gold. Prices should breach $2,000 soon, Citigroup analysts including Aakash Doshi said in a note, raising the bank's short-term target for the metal to $2,100.

"Prices seem biased to stay higher for longer, with 2019-20 emerging into a unique bull regime for the yellow metal," the bank said, adding that prices could even reach $2,300 in six to 12 months under a bullish scenario.

For UBS, gold around $2,000 may be the "new normal" with the current set of drivers, and prices could climb to $2,300 in its "risk" scenario, said Wayne Gordon, executive director for commodities and foreign exchange at UBS's wealth management.

issacjohn@khaleejtimes.com

author

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.


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