Gold futures inched higher on the last day before Christmas as investors tried to keep the market afloat in the face of a firmer U.S. Dollar. Given the extremely low pre-holiday volume, we’re going to call the move a non-event since it was probably fueled by computer versus computer trading.
On the last day of trading for the week, February Comex gold settled at $1878.10, up $5.10 or +0.27.
But we’re not interested in gold’s one-day performance, we want to look at its longer-term performance. We really don’t care how much it’s up since December 31, 2019. We want to know what it has done for me lately and why.
It’s been over nine months since the February gold futures contract reached its low of the year at $1461.70 on March 16 and over four months since it topped at $2099.20 on August 7.
Since its low, it is up $421.50 or +28.84. Since its high, it is down $216.00 or -10.29%.
Since hitting its high, the dollar has crashed against a basket of currencies to a 2-1/2 year low, while stocks and Bitcoin have reached all-time highs. Meanwhile, the coronavirus pandemic has worsened with new cases and deaths rising globally every day, but we’ve seen the rollout of at least two vaccines.
This tells me that gold is not the safe-haven asset that people think it is. If it was don’t you think we’d be moving lock-step with the surge in COVID-19 cases? It seems whenever gold is up on a daily basis, some broker is telling Reuters that it is rising because of safe-haven demand. Apparently, they don’t have access to longer-term charts.
We’ve also seen that the relationship between gold and the U.S. Dollar is currently skewed. Just look at what gold and the dollar have done since early November. In my opinion, the relationship isn’t working because in March, the Fed flooded the world with U.S. Dollars because the global central bank’s demanded its liquidity.
Since mid-summer as the global economy began to improve, these same central banks have been dumping dollars. They began to accelerate their selling shortly after the U.S. election when Pfizer announced a successful vaccination trial.
So one can conclude that the U.S. Dollar isn’t really falling apart because the economy is bad or interest rates are low or because of fiscal stimulus. It’s moving back to where it was before the Fed’s campaign to flood the world with dollars.
Once these excess dollars are removed from the global economy then we’ll likely see gold’s true relationship with the greenback.
However, stripping out all the factors that took gold up and is taking gold back down, I think one has to conclude that the direction of the next major move will be determined by the success of the vaccines.
We won’t really know for six to nine months whether the vaccines are working to stem the spread of the virus, but I don’t think gold investors are willing to bet against it working at this time. This is why gold prices could be capped for months.
Meanwhile, monetary and fiscal stimulus will be enough to provide support. This adds up to a rangebound trade where professionals sell rallies and buy dips.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire
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