Gold markets appear to be consolidating in anticipation of future gains as the price of the safe haven metal trades near $1,850 per ounce after hitting its most recent record highs in August 2020.
Interestingly, these trends have resulted in a true paradigm shift for market valuations that saw the price of gold vault key psychological levels at $2,000 relative to the U.S. dollar.
At the beginning of this year, many financial analysts probably thought that these types of moves might be impossible, given the fact that the S&P 500 has traded near its own record highs and this is the type of environment that can often be disappointing for holders of precious metals.
However, as gold markets analyst Tony Davis recently explained, many of this year’s bullish price moves could have been anticipated due to the important dynamics that currently exist when we analyze relative changes in global supply of precious metals and the national debt in the United States:
“In the past, the United States government used gold and silver to back its currency and allowed citizens to exchange cash for precious metals. Because the dollar’s value was tied to the price of gold and silver, the Federal Reserve couldn’t print more dollars without inflating the prices of these metals and potentially causing a run on the banks. Eventually, our financial system officially shifted to fiat currency. This made financial discipline less of a priority and allowed central banks to print more money and drastically increase the national debt.”
Of course, these important macroeconomic factors could continue to build, given the ways new stimulus proposals from the Biden administration might raise long-term trends in consumer inflation. In addition to this, the possibility of a no-deal Brexit event would only add to the current macroeconomic uncertainties we are seeing around the world — and each of these factors should continue to support the price of gold in its current run higher.
Since August, trends in GOLD/USD have been decidedly bearish and there have been many market analysts that have suggested that the Great Gold Rally of 2020 has officially come to an end. However, my regular readers know that I have been bullish on the prospects for gold for quite some time —and I do not expect these trends to be ending any time soon.
From a technical perspective, I believe that there are still bullish arguments that are relatively clear as long as GOLD/USD manages to hold onto key support levels above $1,760 remain valid. If we do see this level break to the downside, I would expect markets to continue moving lower (into the $1,680 region).
However, I am currently viewing the post-August declines as a period of consolidation that is likely to emerge before we see another strong bull-run higher in GOLD/USD. Initial resistance for the yellow metal might be found as we approach the November highs (near $1,950 per ounce).
But if we can see a clear break through this level, I expect to see a re-test of the all-time highs in relatively short order and this could cause market trends to establish a firm footing above the psychological markers at $2,000 for most of next year.
Ultimately, I believe that traders should position for much higher support levels that might emerge over the next few months and these bullish technical trends could be solidified even further if we see a deterioration in U.S. economic data reports (such as national unemployment figures or a stalling rate of growth in GDP figures) in 2021.
Richard Cox is a personal investor with more than two decades of experience in the financial markets. He is a syndicated writer, with works appearing on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine.
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