All That Glitters? The Case for Gold

The future might just be as good as gold.

The recent price action of the precious metal has caught the attention of many investors. Following two flash crashes, could the gold drop be signaling an upbeat sentiment on the market, or could it be a harbinger of doom? Let’s take a closer look.

What is going on with gold lately?

Both gold and silver seem to be on a downtrend.

The yellow metal recently experienced a flash-crash and there seems to be potential for a bigger drop as it reaches its critical point while still facing some headwinds.

On the other hand, intraday charts are showing significant volume which may seem like smart money is accumulating, which possibly signals gold’s low.

What drives the price of gold?

There are many factors which contribute to gold’s price movement.

We know that the precious metal usually moves opposite to the United States Dollar, while also having a natural demand in many industries and in central bank reserves, but what are its common catalysts?

Here’s three things you should keep an eye on, as they correlate to the yellow metal’s price movements:

  • Inflationary pressures: Inflation is looming, and it slowly erodes the value of money and other fixed-income types of investment.

Moreover, gold might rally because printing money will eventually take its toll.

  • Economic strength: historically, when economic numbers show strength, the tendency is for gold to experience a drop.
  • Real interest rates: arguably the most important explanatory variable in terms of the price of gold (or the gold-dollar exchange ratio if you prefer).

What does that tell us and where do we go from here?

Some analysts will forecast gold prices based on supply-demand fundamentals, while others will point you towards macroeconomic factors.

An important question to be made for now in terms of gold prices is how exactly will a stimulus-fueled, post-pandemic world react, as it learns to live with the COVID-19 virus and slowly begins its recovery, all while still being heavily affected by several supply-chain bottlenecks and the possibility of new variants emerging.

The fact is, economies can be and absolute nightmare to predict, but people’s reactions to economic changes are a whole different ball game.

This leads to what is probably the most important question when dealing with gold:

Should you be scared?

Any investment is inherently betting on something and investing in gold is, in its essence, going long on fear.

Despite the latest drop, the yellow metal continues to draw in consistent ongoing demand which gives some credence to the idea of smart money going long on human fear and calling out the FED on its “transitory inflation” speech.

On the opposing side of this argument, the stock market is the best gauge of the mindset of the masses and investors continue to seem eager to pile.

In fact, summer of 2020 even gave us a rare sight as both stocks and gold rallied together, so the key here might just be not trying to front run anything, rather understanding how gold is performing relative to how the stock market and the dollar are moving.

Wrapping up

Trying to predict any movements here might be unfruitful, as opposed to following trends and waiting for reversals.

Remember that the FED has historically predicted 0 (zero) recessions, but the charts will not fail you in telling you the truth, so remember to keep a close eye on them because there just might be a golden opportunity coming your way.

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