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Gold Falls to a Critical Threshold. Why Investors Should Take Note.

After hitting a record high in the summer, the price of gold has been sliding over the past few months, as the stock market and Bitcoin keep hitting new highs.

The precious metal is now at a critical testing point. Gold might have lost some of its luster as an inflation hedge in favor of the cryptocurrency, but its long-term uptrend should remain intact.

Amid sharp market volatility earlier this year and inflation concerns, gold has rallied nearly 40% from March to August, topping out above $2,000 per ounce for the first time in history. Despite the bout of excitement for the centuries-old hedging asset, the price of the precious metal has pulled back 14% since its August peak and is now trading near a critical threshold.

For the first time in nearly nine months, gold crossed below its 200-day moving average on Monday, wrote Jason Goepfert, president and CEO at SentimenTrader, in a Tuesday note. This, he argues, could be the “first real test of its long-term trend.”

The 200-day moving average is usually seen as a major support level for stocks and other investments. Moving below the threshold often signals the ending of a continuing uptrend. But if gold is able to bounce back from the support level and stay above the line, it could signal the return of a bullish trend.

From a purely statistical perspective, that seems more likely to happen. Historically, after gold has dipped below its 200-day moving average after staying above the line for more than 100 days, it tended to resume its uptrend, wrote Goepfert. In 14 of those cases since 1978, the price of the precious metal was higher over 70% of the time over the next six months and one year. The median returns over the two periods were 4.3% and 9.0%, respectively. This is a good thing for gold miners as well, whose stocks often outperform the metal itself.

So far, gold seems to be reflecting that trend. After touching the support level earlier this week, its price has bounced back from $1,780.90 per ounce on Monday to $1,834.40 on Wednesday.

Gold’s high price should remain intact for some time. While the stock-market volatility seems to be largely behind us, the economy is still struggling, and there’s no fiscal stimulus in sight. That makes gold a good bet against uncertainty in 2021.

What’s more, global central banks and governments have continued to indicate infinite quantitative easing, low to negative interest rates, and unprecedented levels of monetary and fiscal stimulus as a solution to cure economic disruptions caused by the Covid-19 pandemic. That means inflation—after remaining subdued for years—is likely to come back in the coming years, and gold has historically been a hedge against that trend.

“The world is now in a position where the stopping of the paper money printing presses would immediately burst multiple artificially created bubbles,” wrote Bryan Slusarchuk, CEO of gold-mining company

Fosterville South Exploration,

in an email to Barron’s. “Because of that and the growing acceptance of ongoing helicopter money, the printing presses will not slow down anytime soon. While the competitor paper currencies are being printed in reckless abandon, gold is the only currency that cannot be printed.”

The pullback in gold since its March rally will most likely serve as a temporary reset and not a change in trend, according to Goepfert. “Whenever a trendy market like metals or currencies shows nascent signs of a shift in momentum, it can get scary for those positioned in the direction of the prevailing trend,” he wrote, “When the shifts happen, they can be absolutely relentless. So far, we’re not seeing too many compelling signs that this has triggered for gold.”

Still, there are some troubling signals for gold bulls. As a hedge against other currencies, gold is supposed to rally when the dollar falls. But lately, the bullion has been falling along with the dollar instead. This, writes Goepfert, suggests that something else is pushing gold lower that shouldn’t be.

The recent surge in Bitcoin price might be one possible culprit. The cryptocurrency has rode a ferocious bull run, rising more than 90% since early September to a new all-time intraday high of $19,834.93 on Monday. That topped the previous record of $19,783.21 set on Dec. 18, 2017. The price has since fallen back a little to $19,143.92 as of Wednesday afternoon.

As Barron’s Avi Salzman recently wrote, Bitcoin’s appeal has reached well beyond millennials and blockchain geeks to a much wider public, and even some long-established professional investors and big corporations. To them, Bitcoin—like gold—can serve as an inflation hedge against an expected long period of monetary debasement. Since Bitcoin’s supply is capped at 21 million, it can’t be debased in the same way as fiat currencies.

Although the value of gold still dwarfs that of Bitcoin—total aboveground gold reserves are worth more than $10 trillion, compared with Bitcoin’s $320 billion—gold demand could suffer if Bitcoin becomes the more popular inflation hedge for the next generation.

Still, whether gold or Bitcoin, investors should only hold a small position in a diversified portfolio. While both can serve as a hedge against a market meltdown and inflation, they’re not productive assets and don’t generate cash flows like stocks and bonds do. That means they’re only worth what someone else is willing to pay.

That said, the opportunity cost of holding gold—or Bitcoin—is currently very low, as real interest rates have fallen to the negative territory and are expected to stay there for a while.

Write to Evie Liu at [email protected]

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