After two weeks in consolidation mode between the $1,800 and $1,820 levels, gold finally broke the resistance and jumped to trade at highs since September 2011.
The catalyst has been both risk aversion and appetite in a perfect storm fueling the metal's uptrend.
Currently, the XAU/USD is trading at $1,817.75, which is 0.43 percent up in the session. But to have a better context, gold is rising around 20 percent year-to-day, a run of approximately 300 dollars from January's opening price to current levels.
Everything looks adding to the gold bullish sentiment. Both technical and fundamental pictures are bullish, and it seems a matter of time that the metal will reach fresh multi-year highs around $1,900, $2,000, and even $3,000, as some banks have suggested.
The COVID-19 factor
The current sentiment market is driven by the COVID-19 impact in the economy and how long the pandemic will stay with us.
According to the latest update of COVID-19 Dashboard by the Center for Systems Science and Engineering at Johns Hopkins University on July 20, over 14.6 million cases have been confirmed in 188 countries. Also, over 608 thousand coronavirus-related deaths have been declared during the pandemic.
By countries, the United States is the most affected with over 3.8 cases and more than 140 thousand deaths. Brazil, with more than 2 million and India, with over 1.1 million trail the American union.
However, what is more worrisome is the rate of new daily cases all around the world. According to the CSSE, around 220 thousand new cases are diagnosed every single day. In the US, over 60 thousand new cases are confirmed daily.
In that framework, any news that brings new cases, more deaths, etc. will hurt the market's sentiment. On the other side, any economy reopening, developments in vaccines, or fewer cases will cause euphoria among investors.
A safe haven but also investment
In the middle of everything, there are gold prices. XAU is trading right now in kind of a perfect storm where risk aversion fuels the metal amid its traditional safe haven status. So, any bad news will stoke the metal.
On the other side, any good news will spark risk appetite that will also fuel the metal due to its condition of safe investment and a new play as an "inflation-hedge asset," as analyst Daniel Ghali from TD Securities said recently.
According to Ghali, "gold is in the midst of a regime change, shifting from a safe-haven into an inflation-hedge asset."
In that "new" condition, "gold prices have increasingly been correlated to risk assets. This is driven by common drivers impacting both risk assets and gold – namely, the surge in liquidity that has driven both risk assets and gold higher, as capital shelters itself from negative real yields in risk and real assets."
Besides, free money injected into the economy by central banks and governments worldwide is giving the needed stamina for gold bulls to open or even increase positions in the metal.
A bullish technical point of view
Technically, gold is trading in the middle of a healthy upside trend supported now by the 1,780 floor. Long term MACD suggests that the trend is bullish while momentum is gaining strength after the consolidation days. Besides, moving averages are aligned north.
In a separate note, TD Securities analyst said that gold is being driven by technical factors but also macroeconomic and fundamental themes.
"A decomposition of the themes driving trading decisions reveals that macro themes and technicals have driven an increase in length, while risk-on has had a limited impact on positioning, and has been positively correlated with length on average over the last month," commodity strategists write.
On the other hand, the latest CoT data from the Commodity Futures Trading Commission revealed that speculative bullish gold positions declined slightly last week. It could be the answer to the latest period of consolidation experienced by the metal.
However, today's run suggests that after a consolidation period, bulls are ready to attack fresh highs in the next few days.
Fundamentals also support gold
Macroeconomic themes are also driving gold rally as investors are looking for COVID-19 developments and tensions in the trade war between the United States and China. Besides, inflationary pressures to the downside in the United States and, as mentioned above, more stimulus plans are pushing the dollar down.
As you may know, a weak dollar is a perfect situation for a strong gold. It has been happening since March, and it looks to remain the same for the rest of the year, especially when the economic impact of the new coronavirus is expected to last more than previously anticipated.
Back in April, Bank of America said that gold prices could jump to $3,000 per ounce in a report titled "The Fed can't print gold."
In the report, Bank of America raised its 10-month target from $2,000 to $3,000 amid central banks' adjustments and stimulus around the world.
In the report, analysts said that the balance sheet would be increased by huge percentages. "As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure."
They concluded, "investors will aim for gold."
This Market Analysis has been published by a guest writer at XBTFX .