Basic factors of Gold movements

Gold is approaching its historical highs. Scrooge McDuck is once again the richest fictional character.

Since the days of the Covid-19 pandemic, investors have begun to return more and more often to their roots – to look at how their grandfathers traded metals and follow in their footsteps. Be that as it may, gold has always been the most important economic unit and a way not only to save one’s fortune, but also to boost it.

Since the abandonment of the gold exchange standard, the markets have changed their behavior quite a lot. The Nixon shock alone is worth something. Although some economists believe that the shock had positive sides.

The fact is, at the beginning of the Nixon reforms, the United States did not have enough gold to back the dollar, and a further exchange of dollars for gold could have caused more negative consequences, especially if the exchange rate against gold was artificially maintained. In this case, after the exhaustion of the US gold reserves, a stronger devaluation could await, and a complete loss of confidence in the dollar as a reserve currency.

But let’s get back to the pandemic times and the protracted crises that constantly replace each other before it. Gold, as a stable unit of account, along with cryptocurrencies, has further strengthened its position as a means of preserving capital, or, in other words, as a safety cushion for large and medium-sized investors.

Just recall the lockdown. The pandemic itself has given a huge boost to e-commerce. Everyone was locked up at home, and no one had anything better to do than to look at the charts of the number of cases and exchange rates. It was then that gold began to attract more and more attention, gaining positions and trading volumes.

Already at the end of June 2019, the resistance in the range of 1350-1400, which had held the price since April 2013, was broken through. This was facilitated by a number of factors and news about changes in interest rates.

The main factor behind the rise in gold prices this year was precisely the global decrease in interest rates against the backdrop of increased geopolitical uncertainties in Europe around Brexit, as well as a trade war between the US and China.

The price of gold is an important economic indicator that allows you to assess the risk appetite of investors. This is manifested by the fact that the higher the trading volumes of gold, the more insecure investors feel in other markets and therefore prefer to hedge their positions in order to offset potential losses.

Gold prices have been rising steadily since November 2022 amid fears that turmoil in the banking sector signals more serious problems for the economy. And in light of recent events related to the US banks, this turned out to be very helpful

Meanwhile, traders’ attention remains focused on the Fed’s next move on interest rates as the regulator assesses data suggesting higher inflation in February amid the collapse of two regional banks.

Traditionally, metals are seen as a hedge against inflation, but higher rates increase the opportunity cost of owning an unprofitable asset. In other words, it may turn out that gold will be significantly overbought by the time it hits an all-time high.

The news background has a positive effect on price growth, which attracts more and more capital. But if the difficulties disappear quickly and there are no more bank failures, the markets could move quickly in the opposite direction again. However, according to analysts, the overall uncertainty in the financial markets is likely to continue, given the inflated prices for many assets that have taken place in recent years.

Thus, we can conclude that attention to gold and cryptocurrencies as a means of preserving capital, will only grow. And the trend towards the transition to such assets will continue. Judging by the gold price chart against the dollar (XAUUSD), local highs containing the volumes of sellers are breaking through without any problems.

And the acceleration of the market will only continue. The potential for a breakdown of the level of 2000, fixing above it, and moving to a breakdown of 2050 is rapidly increasing.

With a high probability, the following may also happen – the price will renew its historical maximum, but at this moment sellers will become more active, especially if this coincides with the strengthening of the banking sector or structural changes in the Fed. In this case, we will be able to see a false breakdown and a systematic decline to the 1900 area. The probability of a quick collapse also remains, but it is too early to even think about the breakdown to 1700.

Be that as it may, gold will not lose its relevance under any circumstances. Traders understand  that if the integrity of printed money fails, then we will again return to the “minting of gold coins”.

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