As we discussed in late July, the gold price will ebb and flow, but will continue to benefit from unlimited money printing, which most recently has been triggered by central bankers’ various responses to the coronavirus, led by the US Federal Reserve. As we said then: the importance of owning a bit of gold in your portfolio has only increased.
A weak US dollar is a positive for gold
The impact of excessive money printing in the US is negative for the US currency. Given that the gold price can be denominated in a basket of currencies, a weak US$ normally means a higher US$ dominated gold price. Gold is also portrayed as a safe haven against inflation, as it has generally been shown to rise with inflation. However, inflation has been very low in recent years. Excessive money printing may lead to higher inflation at some point. In fact, most expert commentators tend to point to a very benign inflationary outlook over a 2-3 year horizon. But after many years of low inflation, there is a risk that one day it will crack upwards, perhaps unexpectedly. Several catalysts are possible.
Two potential inflation catalysts
Trade with China. The west has inhibited inflation by transferring manufacturing to lower cost offshore countries, particularly to China. Trade relations with China have deteriorated, cyber activity has become more prevalent and China has become less friendly politically. China has also become less cost competitive compared to where it was, as its own economy grows. Some manufacturing may return to higher cost jurisdictions where inflation is a higher risk.
COVID-19. Countries have realised that they have become very dependent on overseas manufacturing for even crucial goods. There is now much more talk of onshoring the manufacture of goods where there is a dependency on manufacturing in China and elsewhere. There is also talk of onshoring manufacturing to create jobs. These trends may mean some lower cost sources of supply are replaced by high cost domestically supplied items with associated inflationary pressures.
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What the technicals say
Trading at close to US$1900 an ounce, it’s been a wild year for the yellow metal. Technically, the gold price made a low of around US$1,045/ oz in December 2015 and has been in an uptrend ever since. It peaked at around US$2,075/oz in August 2020 before correcting to approximately US$1,850/oz on 24 September. This may have been a low before the next leg upwards, but we would need to see a break above US$1,973/oz for an initial confirmation. After the correction, the gold price rallied to US$1,920/oz before a small sell off. In the event of further downside, there appears to be initial technical support around US$1,810/oz and potentially quite strong support around US$1,750/oz.
Monday priting underwrites gold being stronger for longer
The fundamentals of substantial money printing and possible resumption of inflation have the potential to lead to higher gold prices. Technically, the gold price is in a strong uptrend on a monthly time frame.