Analysis by Fxview, a
leading Forex and CFD brokerage part of Finvasia Group. Licensed by CySEC, the
FSC and the FSCA, Fxview offers exposure to Forex and more than 200 CFDs on
stock shares, indices, commodities and cryptocurrencies across its MT4, MT5 and
ActTrader platforms. For more information about Fxview and its extensive
offering, visit the website.
In this analysis, Fxview
market analysts take a closer look at the behaviour of gold over the last two
decades, highlighting its safe haven and hedge characteristics.
At the turn of the 21st
century, gold embarked on a lustrous journey, from trading at a low of $277.10
in 2002, to touching a high of $2075 in 2020, amounting to nearly 11% compound
annual growth rate and about 650% return in over 20 years, the latest analysis
by Fxview reveals.
The decade of 2002-12 saw the
metal turn brighter by nearly six times, while the 10-year US treasury yield
fell from 5.4% in 2002 to 1.3% by 2012. The average annual US CPI rose from
1.6% in 2002 to 3.9% in 2008, which to some extent supported the demand for the
yellow metal, considered to be an inflation hedge.
Following the 2008 financial
crisis, the global GDP shrank about 5% from 2008 to 2009, which boosted the
safe haven appeal of gold. Central bankers worldwide slashed lending rates with
the US Fed bringing the overall rate down to 0-0.25% by December 2008.
Altogether, the high-priced metal gained nearly 75% from 2008 to 2012. By 2013,
with the announcement of a likely Fed tapering, treasury yields surged while
the non-yielding metal began to slump and plunged nearly 40% between 2013 to
2015.
Making a U-turn amid rising
geopolitical tussles and an unprecedented global pandemic, bullion’s safe haven
attraction started gaining momentum. It peaked at an all-time high of $2075.14
in March 2020, followed by a gradual recovery across economies and surplus
money ensuing from pandemic-related stimulus packages.
These corroborating factors
caused the exuberance associated with the precious metal to subside and
equities represented by the S&P 500 to rise by nearly 26%, while keeping
the yield on the 10-year US treasury low, between 0.9%-1.5%.
Next, bullion scored its
second best at $2070.42 (March 2022) as a fallout of the Russia-Ukraine war.
Investments in gold remained on a back seat in 2022, mainly due to the hawkish
monetary policy observed by Central Bankers worldwide to combat inflation.
The Federal Reserve embarked
on its fastest ever rate hike cycle, increasing the overall rate by 450 bps in
less than a year, rendering the non-yielding metal relatively unattractive.
Although the level of inflation peaked by Q3 2022, several other economic
parameters remained sticky, especially a tight labour market, warranting the
need to continue monetary tightening. Stringent lockdowns in China, the largest
gold consumer, further limited the metal’s upside in 2022.
The way forward
An impending recession and a
rate hike pause are likely the key catalysts to drive the yellow metal’s growth
going ahead this year. On the demand front, jewelry fabrication and industrial
consumption is likely to take a hit. This shall be offset by demand for
investment and reserve holding by central banks owing to the metal’s safe haven
appeal.
The World Gold Council’s
estimate indicated a substantial jump in central banks’ gold demand in 2022 to
hedge against any forthcoming financial crisis, while also signals an attempt
towards dedollarisation by the
economies, making the case stronger for gold as a safe-haven asset.
|
2021 |
2022 |
|
|
Gold demand |
4012.80 |
4740.70 |
|
Jewelry |
2230.60 |
2189.80 |
|
Technology |
330.2 |
308.5 |
|
Investment |
1001.90 |
1106.80 |
|
– Bar and coin |
1190.90 |
1217.10 |
|
– ETFs and similar products |
-189 |
-110.4 |
|
Central banks & other inst. |
450.1 |
1135.70 |
(Source: World Gold Council)
Macroeconomic and geopolitical tailwinds
A deteriorating economic
situation in the recent days has been highlighted by several factors including
the following:
● Failure of several US financial
institutions including the SVB, Silvergate Capital, Signature Bank and First
Republic, in addition to the discount buyout of the ailing Credit Suisse
● Huge layoffs by mainly the tech
firms. US unemployment rate rising to 3.6% in the latest estimate for Feb 2023
● Rising cost of financing
exacerbating upsurge in sovereign debt levels
● The limited effectiveness of
monetary contraction in targeting supply-side inflation
Deglobalisation
Low inflation levels, which
central banks are trying to target, were largely an attribute of a globalised
world, as low-priced goods were produced by outsourcing to other economies.
With a sense of deglobalisation plaguing the world’s nations, especially since
supply chain performance reaching pre-pandemic levels by mere monetary
contraction seems far-fetched, according to the Fxview analysis.
With the risk of geopolitical
tensions likely to persist, the outlook for gold is strengthened further as not
just an investment alternative but a store of value. The war in the Eastern
Europe being far from reaching an end, the intriguing bonhomie between Russia
and China and the widening tensions between the West and China are some of the
highlights of the current global paradigm.
Technical outlook
The precious metal recently
moved higher past the $2000 psychological level but failed to close above the same.
In the near term, it is likely to retest the zone, attempting to breach its
all-time high of $2075/oz, which also corresponds with the 0.5 Fibonacci
extension level.
Gold is further poised to
clinch a target of $2180, which is a key resistance level corresponding to the
0.618 Fibonacci level followed by a subsequent target of $2200 to be attained
by H2 2023. Level of $2200 stands to be crucial, as it also falls in line with
the historical growth rate of 11%.
Furthermore, a surge to $2500
by H1 2024 seems plausible, although caution must be observed nearing $2337
(0.786 Fibonacci level). Caution must also be observed as the downside risk
remains considerable due to strong fundamental factors in the short run, which
can pull the metal down to its immediate support at $1930, followed by support
level at $1834/oz, as shown below.
Some of the macroeconomic
headwinds include the continuation of a contractionary monetary policy by the
Fed, recovery in financial markets and an easing of geopolitical tensions. The
Federal Reserve has recently announced the creation of a Bank Term Funding
Program to provide relief to eligible depository institutions struggling with
liquidity in the near term, which led to temporarily allaying the concerns of a
financial crisis.
In this context, the outlook
on gold is positive, as investor interest in the shiny metal seems to be
improving in the longer term, bolstered by the current economic climate
worldwide.