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Gold Recovers: Where to Next?

20 August 2021

Why the end of the gold standard is good you

Friday 20 August 2021

In this week's market report:

  • 50 years without an anchor

  • Central banks are net buyers of gold

  • Inside the office this week

  • 400-oz bars are popular…

Shae Russell

Shae Russell,
Group Communications Manager

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Gold recovers: Where to next?

US dollar gold price
Daily chart

US dollar gold price Daily chart

(Click to enlarge)

Source: Trading View

Gold shakes off the flash crash: The near 8% fall of two weeks ago is a distant memory. The gold price in US dollars has seen a strong rebound and is currently trading at US$1,783. The yellow metal has regained about 80% from the sell-off.  

Still under pressure: Technically speaking, the US dollar gold price is under pressure and gold is stuck under the 200-day moving average (MA) of US$1,812.

  • While gold has clawed back most of the losses from the flash crash, it has struggled to move above US$1,800. This price is an important psychological level and will take an unexpected event to nudge it up and over.  
  • Any sudden move either way is unlikely until the Federal Open Markets Committee (FOMC) ends next week.
  • Be ready for a surprise: Sentiment is building around Fed taper talks acting as a ceiling for gold.  
  • For reference, December 2021 gold futures are stuck at US$1,790

Gold bulls rejoice: Gold is resilient. The flash crash didn’t drive gold below the key support level of US$1,680, which means this is likely the floor for this price cycle. If you are looking to increase your gold holdings, consider gold to be trading at a discount.  

  • ETFs inflows are steady: How history remembers this flash crash remains to be seen. Nonetheless the sell-off was mostly paper selling of gold (confined to futures markets), as physical gold positions held by exchange traded funds (ETFs) remained steady.

Bears awaken: The charts suggest  the yellow metal is going to struggle to stay above US$1,800 in the short term. Moving above here will be tough.

  • Will the bulls stampede or the bears roar?: That all depends on how the price trades. It’s far too soon to call for a break out in either direction. If the trading range widens, indecision reigns. If it tightens and consolidates, we may be on the verge of a surprise move.

Great news for Australians: The Australian dollar has delivered strong tailwinds for the Australian dollar price of gold.  The Australian dollar/US dollar exchange rate (AUDUSD) has fallen 3.15% since the start of the week, moving from 73.69 US cents cents to today’s 71.39 US cents.

Our currency weakness has boosted gold’s comeback, lifting the Australian dollar gold price up AU$112 per ounce since Monday, a tidy 4.73% increase.

The Australian dollar gold price is now poised to move above AU$2,500, which is hasn’t reached since January 2021.

Australian gold price
Daily chart

Australian gold price Daily chart

(Click to enlarge)

Source: Trading View

Some words on the Federal Reserve Bank: From the Financial Times:

‘A top Federal Reserve official has warned that the US central bank’s emergency bond-buying programme is ill-suited for an economy held back by supply constraints, urging instead a speedy end to the stimulus to avoid burdensome debts and inflationary pressures.

‘Eric Rosengren, president of the Boston Fed, told the Financial Times that he would support the central bank announcing next month that it would begin to wind down or “taper” its $120bn in monthly asset purchases this autumn and get on track to halt them by the middle of 2022.’

US retail data wasn’t strong: Worth noting is retail data in the US is weak. Americans are spending less. The jury is out on what is behind slowing discretionary consumption in the US. Though  speculation mounts it’s is the delta variant of Covid making people more cautious as uncertainty remains.

  • August 2021 US retail data will be a better gauge of consumption as this is America’s ‘back to school’ shopping month.
  • Consumers make up 70% of the US economy. Their spending matters greatly to the health of the US.

50 years without an anchor

We passed a dubious milestone this year.

The 15th August 2021 marks the 50th anniversary of President Richard Nixon ending the convertibility of US dollars into gold. In markets this event is colloquially known as ‘ending the gold standard’.

The Bretton Woods agreement wasn’t a traditional gold standard, gold acted more like an anchor to a monetary system.

A true gold standard is where a country’s currency is linked to the value of gold, but the value of gold is floating, and its value reflects economic activity.

The Bretton Woods agreement however, saw the value of gold per ounce fixed to one US dollar. Other currencies were then pegged to the value of the greenback. This enabled countries to trade using their fiat dollars, with the knowledge they could exchange US dollars for gold at any time. Bretton Woods was meant to ensure exchange rate stability for international trade.

While many gold proponents commiserate the end of Bretton Woods, it’s worth remembering that it came with a ban on private ownership of gold. Nixon ending the Bretton Woods agreement allowed physical ownership of gold for the first time in decades.

The demise of Bretton Woods is a fascinating look at monetary history and deserves more than a couple of paragraphs. Here is a short synopsis of the forces that lead Nixon to closing the window.

Central banks are net buys of gold

Central banks are back as gold buyers. The Reserve Bank of India (RBI) purchased 29 tonnes of gold in the first half of 2021, bringing their total gold holdings above 700 tonnes for the first time. This equates to a 27% increase in the last two years for the RBI. 

Similarly, Banco Central do Brasil (BCB) — the central Bank of Brazil — is another major buyer of gold, adding 62 tonnes of gold in the last three months. Bringing their gold foreign reserve position to 130 tonnes, a very large 92.4% increase in their holdings.  This is the BCB’s first purchase since November 2012. 

The World Gold Council notes that central banks are likely to remain net buyers of gold for the rest of 2021, writing:

‘Central banks are likely to continue buying gold on a net basis in 2021 at a similar or higher rate than in 2020, driven by a continued focus on diversification and risk management.’

Inside our office this week

One person’s gold price fall is another person’s buying opportunity. This week we have unexpectedly seen several 400 ounce bars bought by self-managed super funds (SMSF), which are accredited Good Delivery for Comex. Needless to say our staff were a little surprised, as normally our most popular bulk bar is the ABC Bullion 1kg bar.

With gold trading under US$1,800 who can blame them?

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion

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