With an increase of more than 25% since the beginning of the year, gold has continued to climb and will probably not stop there. Here are 5 reasons:
Low interested rates make Gold an attractive alternative
Global real and nominal yields are extremely low, in some case negative. As gold pays neither interest nor dividend, there is usually an opportunity cost associated with it. Currently this cost is near zero.
Today when you buy a Swiss, German or Japanese government bond, you actually pay interest, even on longer-term maturities. In other words, lending money has become a privilege. The policy of low rates applied by the central banks is the main reason, and there are no signs of change. Quite the contrary, since the Brexit central bankers have further increased their monetary measures and in such a context, gold appears much more attractive.
Seeking protection against volatility
The purchase of protection in the event of falling stock markets has reached record levels according to the survey of the institutional investors of BAML in the past month. While shares have reached new highs in the year, the potential fall could be even more important. Most investors have no confidence in this market and will continue to seek protection. Gold generally increases in value during times of high volatility, and this could happen very soon. According to a BlackRock study, volatility tends to drastically increase 30 days before the US elections.
Brexit – It’s only the beginning
The Brexit did not worry the markets for long, yet the macroeconomic data indicates the opposite. Sentiment indicators (PMI, ZEW, IFO) showed confidence dropping, especially in developed countries. Once article 50 of the Treaty of Lisbon is released, this will initiate formal exit negotiations that will last for at least 2 years. Out of 27 bloc countries, all but three want to impose on the United Kingdom the free movement of people to access the single market. However, this is exactly what the British do not want. The negotiations will not go without conflicts, and it will take on a greater scale than what we have seen with Greece; who has already weighed in on the markets.
The Yuan and its devaluation has not had its last word
The Brexit seems to have eclipsed the cause of the mini crashes of August 2015 and February of this year. Yet the US dollar resumed its upward momentum and the Yuan has hit a new low since 2010. This risks increasing the flight of capital out of China and therefore further accelerating the decline of the Chinese currency. The trading partners with China, i.e. almost every country, would be losing out.
Gold is at an inflection point
Since the record high reached in September 2011, the bullion has entered a bearish movement. If the secondary trend in the short-to-medium term has returned to an upward trend, the primary trend on the monthly chart remains for the moment on a downward slope. However, gold is at a critical point. A current break on in monthly close above the primary trendline (around $1400), would open the way for $1800 and $1900.
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