Sunday, 7 July 2019

GOLD: POSITIONED TO THRIVE IN LOW INTEREST RATE ENVIRONMENT

Lukman Otunuga
FXTM Research Analyst

The investment case for Gold is set to remain robust as speculation mounts that major central banks will ease monetary policy in an effort to counter a global economic downturn.

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The yellow metal shone with extreme intensity during the second quarter of 2019, rallying roughly 9% to levels not seen above $1435 in over six years, thanks to an environment that included ongoing global growth concerns, geopolitics, trade tensions and Dollar weakness.

Weak macro data, which reflects downward revisions in global growth over the past 12 months, is prompting a handful of central banks including the European Central Bank (ECB), Federal Reserve (Fed) and Reserve Bank of Australia (RBA) to signal a willingness to ease monetary policy and increase economic stimulus to support growth.

In a low interest rate environment filled with chronic uncertainty, Gold can climb another 5% over the course of Q3 - claiming the title as one of the high flyers among safe haven assets, in competition with the Yen.

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Will Gold’s fortunes hang on the Fed’s actions?
What investors need to watch as the second half of the trading year gets underway are the actions of the Federal Reserve. Will the US central bank confirm market expectations and cut interest rates as early as July? If it fails to do so, Gold risks rapidly surrendering its second quarter surge. Essentially, if the Fed sits on its hands in July, profits will be taken from the table on the $120+ rally that transpired in Gold throughout June.

Unfavourable global conditions to keep Gold in fashion
Rising concerns surrounding the health of the global economy is another one of the engines that will help drive Gold prices.

Although a sense of optimism has returned after the meeting between Trump-Xi Jinping at the G20 ended in a trade truce on tariffs, it does not change the reality that global growth is decelerating.

The World Bank recently downgraded its 2019 world growth forecast to 2.6% from 2.9% and if the recent disappointing PMI releases across the manufacturing sectors in Europe, China and the United States are anything to go by, global growth is moving towards the lower bound of 2% as the decade draws to a close.

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Warning signals over potential cracks in the largest economy in the world, indications of tepid growth in the EU, disappointing data from China’s manufacturing sector and lacklustre growth in the United Kingdom amid Brexit-induced uncertainties are likely to sweeten appetite for safe haven assets.

It’s all about central bank stimulus and lower yields
In the longer term, Gold should also find support from lower treasury yields, especially if the 10 year treasury dips below 2% again as persistent growth fears and trade developments result in lower interest rates across the globe.


While the outlook for the precious metal points to the upside, potential roadblocks on the horizon include easing trade tensions and signs of global growth stabilizing. Both outcomes would pose a challenge to buyers.

Gold bulls to dream big and reach for the stars
Taking a look at the technical picture, Gold remains firmly bullish on the monthly charts as there have been consistent higher highs and higher lows.

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Prices have scope to push higher on the monthly charts should $1360 prove to be reliable support. For as long as bulls are able to defend $1360, there should be enough confidence to challenge $1430 and $1500 – a level not seen since April 2013. Alternatively, a decline back below $1360 will most likely swing open the doors towards $1324 and $1300, respectively. This bullish setup becomes invalidated if prices find comfort below $1300.

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