Gold Bulls Revert Back to the Basics

With gold off a little over $60 from the highs achieved yesterday, the question many gold investors and traders are asking is, where to from here? My sense is that the undertones of gold pricing remains extremely bullish. The most recent rise in gold pricing which began on Friday following the U.S. drone strike in Iraq which killed Iran’s Major General Soleimani quickly eroded as cooler heads prevailed, and the potential for a major conflict diminished.

Once it was clear that there was a path being taken by both the United States and Iran that would lead to a de-escalation of the conflict any premium in gold pricing due to that uncertainty quickly vanished.

That being said once we have a clear indication of what price gold will reach before traders acknowledge that the wartime premium has diminished,  traders and investors will refocus on the primary reason’s gold has been gaining value on a steady and consistent basis.

Analyst acknowledge a major pivot and reversal of the monetary policy of not only the Federal Reserve, but the European Central Bank, the Bank of Japan, as well as the People’s Bank of China has occurred.

There are three actions central banks globally have been taking that are highly supportive of gold pricing. First is the reduction of interest rates. The Federal Reserve cut rates a total of three times last year, and plans to keep rates where they are throughout 2020. Their actions are not unique, as both the Bank of Japan and the European central bank have also kept rates extremely low, and in the case of Japan have actually taken rates negative.

Second is the asset accumulation by central banks to infuse the economies of the country or countries that they cover. The Federal Reserve for example has been quietly purchasing $60 billion each month in assets.

Lastly is the accumulation of gold bullion by the central banks throughout the world. This accumulation of gold began quietly in 2018 and fueled a tremendous increase of gold holdings in various central bank vaults. According to Gold.org, in the third quarter of 2019 net purchases by central banks equaled 156 tonnes.

The world is certainly a safer place once a conflict between the United States and Iran de-escalated. However, this does not mean that the conflict between those two countries has come to a complete resolution. There are also other geopolitical concerns that could heat up at any given moment, such as North Korea. But at least for now traders and investors alike can once again begin to refocus on the basics that have moved gold prices to the highest level in seven years.

Wishing you as always, good trading,