The price of gold broke the historical resistance level to go up, leaving many people restless.
With the world economy facing many risks, the stock market meandering, low interest rates, escalating US-China tensions, this precious metal price still had many opportunities to increase.
The drivers of high gold prices
For many of the gold investors, this was what they expected from mid-June 2020, after thef gold price had broken the historical bar to increase. When the gold price surpassed $1,750 per ounce, many people stepped up to buy gold. They believed that when having passed the historical barrier, the price would surplus.
On June 19, Goldman Sachs Investment Bank forecasted the target of gold price in the next 12 months to be $2,000 per ounce. This was also the day when a friend working in Canada sent the writer a warning signal that SPDR Gold Fund received $1.2 billion in net capital in a day. Therefore, from the middle of June 2020, the trend of strong money pouring had started to accelerate.
The reasons were many. Some people thought that gold was a tool to prevent risks well, especially when the world economy was risky, the stock market might even decline again when people realised that the economy could not recover. Others hoped that the low interest rate of nearly zero percent of the major currencies would create favourable conditions for holding gold. Previously, when interest rates were at two percent, holding gold had relatively high capital and opportunity costs for many investment funds.
Another key reason was the rush of countries to ‘print money’, to the point where the Economist recently had the newspaper named ‘Free Money: When government spending knows no limits’. In this context, the basic argument of holding gold appeared. When the Goverment printed much money, money would lose value, so thay would keep gold.
Finally, increasing US-China tensions were also an obvious geopolitical risk, with gold being a good geopolitical risk hedge tool.
Perhaps it was no coincidence that the surge in price of nearly $80 per ounce in just a few days, from $1,800 ounce, occurred after the news about the EU’s 750 billion euro bailout package, and the news of US closure of Chinese Consulate general in Houston was announced.
But regardless of the reason, the top issue was the cash flow of investors. No matter how well the gold backer said, if the investor did not buy gold, then the price of gold could not be high. The cash flow graph of SPDR Gold Investment Fund shows that, from mid-June 2020, the cash flow into this fund had continuously increased, which, only during the period from June 15 to July 22, exceeded $5.8 billion. When money came in a lot, this fund had to increase its holdings of physical gold and gold certificates, which boosted the price of gold.
But that was only part of the story. The more interesting part was on the gold short side. Since early June 2020, there was a report on short selling gold in Canada. It was interesting to note that, with gold passing the historic $1,750 per ounce, hedge funds sold gold at a fairly high level over 10 percent of the total trading volume (after increasing further, surpassing the 15 percent mark in early July 2020).
With such developments, if the price of gold surpasses the level of $1,800 per ounce and the money continued to pour into funds like SPDR, the short-selling funds of gold would lose a lot and they would have to buy gold to settle accounts. At that time, the new gold price might officially grow.
Recent developments seemed to be in line with the above judgment. Predictably, short-selling gold funds had been closing their positions to cut losses in recent days as gold prices in turn overcome new technical barriers. The price of gold increased rapidly because the camp that bet on falling gold prices was deeply lost and had to close the position, contributing to increasing the purchasing power of gold.
This story pointed out two things.
Firstly, the gold price increased because many investors believed that gold would continue to rise, so it should be bought from mid-June 2020 until then and there was no sign of stopping (see graph of money flowing into SPDR Gold Fund).
Secondly, although there were those who believed that gold would increase further, there were still people who had not. Those were investment funds that could sell short gold, so certainly not a novice. These two groups would surely fight for a long time.
Had not seen signs of gold price cooling down
The reason was, many investment funds were getting out of a safe haven as money market funds disbursed tens of billions of dollars into risky assets such as bonds and stocks. According to Lippers’ data, in June 2020, more than $130 billion had left the money market fund and started buying risky assets. But most of these funds were still focusing on bonds and buying gold to diversify their portfolios. Before seeing robust recovery in retail and employment data, they would remain cautious. On the other hand, from mid-July 2020, the US dollar depreciated against many major currencies such as euros and pounds. Usually when the US dollar depreciated, gold would appreciate. These funds, therefore, would rely on the weakening direction of the US dollar and benefit from gold.
On the other hand, if the price of gold increased dramatically, it was not necessarily. Compared to an increase of more than 80 percent since February 2020 of silver, or more than 100 percent of technology stocks like Shopify, gold had only increased by more than 25 percent (from $1,500 to $1,880 per ounce). Therefore, there was room for gold to rise. Goldman Sachs had predicted that the price of gold within the next 12 months would reach $2,000 per ounce.
Gold was not necessarily the most profitable investment instrument. Indeed, gold was nothing compared to some technology stocks that had increased by two times to three times, not even comparable to the increase in the price of silver precious metals very close to gold. But it was the favoured store of value in these turbulent times.
It was important that the price of gold was very high, each increase of only one percent to two percent also raised the price by tens of US dollar per ounce, and this was the tool of Asian interest. Therefore, every time the price of gold increased, even just a few percent, it was enough to make the society stir and many people stand still. The interesting thing about observing the gold market was there.
