Why Investors Should Be Bullish on Gold

The comments below are an edited and abridged synopsis of an article by ETF Daily News

In September, the ECB cut the short-term deposit rate by 10 basis points, and told the market that it would restart QE in November. Sluggish European economic growth and concerns over Brexit have caused a continuation of dovish policy and has pushed rates to a new low at -50 basis points.

Why Investors Should Be Bullish on Gold | BullionBuzz
Global gold price commodity concept. Selective focus. Horizontal composition with copy space.

The gold market was waiting to hear from the Fed, and the guidance and interest rate cuts in June and July fueled the recent rally. Gold had risen to its highest level since 2013.

In September, the Fed Funds rate was cut by 25 basis points. The Fed is divided on the direction of rates; some members believe that strength in the US economy does not require lower short-term rates.

The gold price fell to $1,490.70 after the rate cut. By the end of the week, gold was back to $1,520, and price momentum was higher. Open interest remains near record levels.

Falling interest rates make gold a more attractive investment vehicle. While gold offers no yield, that does not matter these days, given the low level of returns on cash. In Europe, with rates at negative 50 basis points, gold does not lose value over time, but euro deposits have become decaying assets.

Gold competes with fixed-income instruments. Historically low rates and a trend that indicates they are likely to continue to decline means that currencies are becoming less attractive. Moreover, the ECB returning to QE amounts to running the printing presses on overdrive.

In addition, there is trade tension between the US and China. The fear of a global recession will continue to push interest rates lower, and cause periods of risk-off where market participants run to safe-haven investment vehicles. Since June, gold has been one of the best-performing assets in the world. It has been in a bull market since 2000, when it took off from under $300.

Technical support remains at the $1,377.50 level, from where it broke to the upside in June. The current period of price consolidation is healthy for gold. We will see new highs and a move to the $1,600 level by the end of 2019.

Please share...

Leave a Reply

Your email address will not be published. Required fields are marked *