Is Now The Time To Buy Gold?

Market participants keep their eyes on the precious metals market and, particularly on gold, which has recently renewed its all-time highs. The metal broke through its 2011 high at $1912 per troy ounce and, without any correction, took over the $2000 psychological barrier. Many traders believed that the asset wouldn’t go any higher. However, XAU buyers managed to push the price above $ 2,000 and gold hit a new record high at $ 2,075.

The correction was inevitable, so gold began to decline on Friday after the publication of a positive US labor market report, which supported the US dollar. The correction spiraled down into a serious crash on Tuesday, when the price plummeted from $ 2030 to $ 1900 and then to $ 1862. The overall gold decline exceeded 10% in just a few days.

The aggressive gold selloff, which occurred on a dubious fundamental backdrop (Russia's COVID-19 vaccine successfully completed the phase of human clinical trials and has been approved for use), indicates that a lot of speculative and "fearful" capital has accumulated in gold, and it’s completely dependent on market sentiment. In such situations, even a slight decrease in the value of an asset is enough to trigger panic among investors, which apparently happened on Tuesday. This is also confirmed by the current XAU/USD dynamic. It took gold only a few hours to retrace back to the $ 2000 area. Having digested the news about the Russian vaccine, which effectiveness remains a big question, investors focused on the factors that had been supporting gold over the past 6 months: new incentives from global central banks, rising inflation, weakening US dollar, as well as growing tensions between the United States and China.

The decline in the US Treasury's real yield remains the key factor facilitating gold growth. We are talking about bond yields adjusted for inflation, which are falling amid interest rate cuts by major central banks and the introduction of stimulus measures designed to mitigate the economic impact of the pandemic. The 10-year TIPS yield fell to an all-time low of -1% last week. Market participants admit that it could dip even lower if the recent surge of coronavirus cases in the United States prompts the Federal Reserve to revise down its key interest rate again. However, even investors already have to pay for the fact that they own bonds. As a result, gold is becoming a more attractive safe-haven asset and a cheaper way to hedge against inflationary risks.

The growth of inflationary pressure will be also facilitated by the trillion-dollar injections of liquidity into the US economy. The US Congress is about to roll out a new stimulus package that could exceed $ 1 trillion. Given the devastating impact of the pandemic on the American economy, the need for extra cash injections will only increase. At the moment, jobless claims in the US amount to 30 million, which means that all these people who lost their jobs will need increased unemployment benefits. Without additional bailout funds, the economic recovery will slow down, which will send the stock markets into a tailspin. Obviously, Trump cannot allow this ahead of the presidential elections. It's worth noting, the situation in 2016 may well repeat itself. To recap, after Donald Trump won the election over Hillary Clinton, investors turned to safe-haven assets, as a result, gold rose by 5%.

Escalating tensions between the US and China play into the hands of gold buyers. The conflict between the two countries intensified when the US expressed its strong dissatisfaction with the measures taken by China to curb the spread of the novel coronavirus which later turned into a pandemic, as well as by the Hong Kong national security law. In addition, the United States decided to close the Chinese Consulate in Houston, and China, in turn, closed the US Consulate in the south-western city of Chengdu. Given this news backdrop, gold is still of great interest for long-term investment. Bank of America (NYSE:BAC) experts expect gold prices to jump to $ 3000 by the end of 2021.