Gold hit new yearly highs in the past few days touching around $1,778 as hedge fund managers increase their stakes on the precious metal. As the US government began quantitative easing to artificially prop the market up back in March, the dollar lost some of its value. Quantitative easing sounds very sophisticated, but it's really a very simple technique the Federal Reserve started doing a lot since the 2008 financial crisis. All quantitative easing means is the Fed is putting money into the market. They do this through the US Treasury, who prints the money mandated by the Fed, and then the Fed distributes it. Money is allocated to banks who have nowhere to put their money except into the stock market because interest rates are sub .25%. As long as the Fed keeps printing money, banks will keep buying stocks, and the value of the dollar will fall. And people will turn their money towards precious metals like gold.
Some analysts believe that this metal as a lot more upside potential. A key indicator they're looking at is that inflation rates will rise on the USD. Basically, buying gold is a direct bet against the dollar. I don't think we've ever seen so much money printed in this given period of time than ever before. So, my bullish thesis is just another way of saying that I'm bearish towards the dollar.
According to Kitco News, investors fear that stagflation will occur. Stagflation is when inflation increases on a currency while the economy is in a period of economic decline or no growth. Right now, we are looking at 44 million Americans unemployed and output is very low. Numbers are much weaker than the same time last year. Usually, this would mean that the market drops and the value of the dollar rises, but this time, it's different.
It's different based on what I said earlier, that the Fed is pouring freshly-printed money into the market. Not only are we generating less capital in the economy, we are increasing the supply of money too, which inflates any currency. Inflation and deflation are natural in economics, but this is on a whole new level. Printing money is not the issue, it's how much is printed. I personally agree with this argument because trillions of dollars printed in a matter of weeks is going to cause a considerable loss of value in the US dollar.
In this particular case, the Fed has got your back... in the short term. Yes, we saw a great rally in the stock market and the USD since March, but this is just in the short term. USD pairs may not be much of a 'safe-haven' in the long run.
Here is XAU/USD on the daily chart. Resistance was clearly broken as prices closed above that level, creating a key support zone. Many bullish traders are looking at that level as a move that will turn sentiment bullish for gold. 'Safe-haven' sentiment is now being turned towards gold and lessened for the USD.
Although I am bullish on the precious metal, it's important to always consider the other side of the argument. One problem that comes to mind when it comes to trading forex pairs is correlation. When the crash happened earlier this year, gold fell too. Pairs like GBP/USD and EUR/USD fell as well while pairs like USD/CAD saw an incredible increase in price. Anything USD-related pair will move with the US stock market in either a positive or negative correlation. Having said that, if the market were to fall again, it is likely that gold will too. This has been what happens in the short term.
Today, news came out that some states saw a record increase in cases thus far. Stocks are dropping along with gold. Although gold has outperformed the S&P 500, it will follow market moves in the short term. It's not something I fully understand, but you will see prices drop on pairs like these in the short term. During the crash, gold fell as much as 14%, and it will likely fall if the US market has a similar drop.
In all, if you are a gold bull, I wouldn't be too eager to get in right now. That key break in resistance is important, but in times of economic uncertainty, be wary of big price fluctuations in the near term. I think gold will become a safe-haven over the US dollar in time, but I'd have to wait and see what the market is going to do in the near future.
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