Gold rallied sharply to end last week, gaining nearly 3% on Thursday and finishing the week 1.4% higher as it rose for a second consecutive week. These gains appeared as equity markets were getting hammered lower, therefore some analysts believe that gold is regaining its luster as a safe haven asset. But with the USD also falling sharply during the same period it’s equally likely that gold was simply reacting to moves in the greenback.
Gold finished the week at $1,222 an ounce, although there was a decline on Friday as equities rallied, and the U.S. dollar firmed modestly against rivals.
How Did Gold Perform on the Market Last Week?
Last week began on a negative note as gold fell 1.4% on Monday, but the $1,180 level held as solid support and the precious metal spent the following three sessions climbing off that support. With the strong move higher on Thursday gold was able to jump past the $1,208 level, which had been the resistance level since early August. This has sparked concerns over a possible trend reversal referring to the price of gold.
The market was relatively quiet on Friday, as traders weren’t ready to take advantage after the large spike on Thursday, which could be indicating an increase in the price of gold into the coming week.
Is Gold Really Back in A Safe Haven?
When gold spiked higher as the rout in global equities was in the headlines, the general believe was that gold is back as a safe haven asset.
Still, the weakness in equities needs to persist to keep gold moving higher, but on Friday equities were well on their way to recovery as investors came to accept the higher Treasury yields. Gold certainly may have found some safe haven support on Thursday, but that doesn’t mean it will last.
Even more, part of the Thursday strength was also due to the weaker U.S. dollar, as gold has been moving in response to the U.S. Dollar’s strength and weakness all year.
The U.S. dollar has remained a guiding force for gold and is expected to continue playing a large role in the movement in gold’s price in the coming year. The Federal Reserve remains committed to their policy of normalization, and this is expected to result in interest rates in the U.S. rising by at least 100 basis points by the end of 2019. Rising rates will lead to a stronger U.S. dollar, while gold prices will fall.
What Could Happen to the Price of Gold This Week?
Even if it was safe haven demand caused by stock market losses that seems to be receding, with global markets, and especially the U.S. equity markets, stabilizing on Friday. Indeed, the Dow gained more than 1% and the Nasdaq rose more than 2% on Friday. The U.S. dollar also stabilized, and gold ended modestly lower. If the recovery in equities continues as the new week begins it’s likely the U.S. dollar will also turn higher.
The other scenario is that Friday’s gains from equity markets was a dead cat bounce and markets will resume their retreat on Monday, so the U.S. dollar could be set to take further losses. That could be enough to push gold above its 100 day exponential moving average at the $1,226 level.
When looking at the selloff in equities the source must also be considered:
1. if it comes from rising Treasury yields the USD will likely soften as well, leading to gains for gold;
2. if it comes from emerging market weakness or trade concerns the USD will likely firm, and gold will turn lower.
Essentially, gold will almost certainly continue to take its lead from the U.S. dollar.
Sources: FXEmpire.com, FXStreet.com and DailyFX.com.
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