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23.10.2020 09:54 AM
Why does gold's only prospect is its price decline?

It was assumed last September that gold's price is unlikely to reach $ 2,000 per ounce in the near future.

Why is this not happening in the wake of the fundamental weakness of the US dollar, which is overhung by a mass of various programs to stimulate the US economy, extremely low interest rates and the expectation of additional comprehensive support measures that markets await either before the presidential election on November 3, or after them?

On another note, what is the main reason for the lack of widespread interest in the gold as a hedging tool for financial risks? We believe that it is due to its equilibrium price in dollars, or rather, the ratio to the dollar exchange rate, considering the incentive measures that would probably still be in place. Nevertheless, gold is worth exactly as much, as the dollar is weak.

So why don't they buy it? Is it because there are a lot of problems in the global economy and uncertainty about the prospects for its development in view of COVID-19?

Perhaps, gold does not generate interest income like bonds or company stocks (dividends). There is no sense to buy it now, as the world economy in general and the economies of developed countries are already at extremely low levels. Moreover, they have nowhere to decline, since there is already a collapse with military conflicts and other related problems.

Investors, on the contrary, believe that global economic recovery will be accompanied by the strongest demand for shares of companies in the context of massive stimulus measures in the world due to the flooding of the financial system with extremely "cheap" dollars, euros, yens, pound, etc., which were pumped by the world Central Banks – the Fed, the ECB and the like.

Markets expect the start of mass production of vaccines for COVID-19, reasonably believing that they will allow the global economy to start actively growing. However, it is really difficult to predict when it will be produced in the West. If the vaccines will be successful, it will expand its purchase around the world, which will initiate the stabilization of COVID-19 and the start of the growth of the world economy.

To sum it up, we believe that gold has no prospects to rise, not only to the $ 2,000 per ounce mark, but higher. Moreover, a further price decline can be expected approximately to the levels that preceded the outbreak of the COVID-19 pandemic this year.

Forecast of the day:

Spot gold is trading in a sideways range. We consider it possible to sell it at any small growth with a likely local target of 1887.50

The EUR/USD pair is under pressure due to a number of negative factors – COVID-19 situation in Europe, Brexit issue, and the high uncertainty of who will win the US presidential election. Thus, we believe that the pair will continue to decline to 1.1750, while remaining below the level of 1.1800.

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Pati Gani,
Analytical expert of InstaForex
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