Gold prices have been in an upward trend for almost 5 years. The trend is determined by comparing the 50-week moving average to the 200-week moving average. There are several reasons why gold is in a bull market. Uncertainty and adverse market conditions generally benefit gold prices. Gold is quoted in US dollars and tends to perform well when the dollar is weakening. As a hard asset, gold can be stored at home or in a bank.
Because gold is a tangible asset, some traders believe it is a viable alternative investment to paper currency. Gold has a long history as a currency, and during the uncertainty of the pandemic and subsequent lockdowns, its value has increased. While the trend in gold has been relatively smooth, the volatility caused by the pandemic in early 2020 led to the highest gold prices in the past 5 years.
Gold is often seen as a “safe haven” asset. It is believed to hold its value during adverse market conditions and is considered an alternative to paper money. When riskier assets experience high volatility, having gold in a portfolio can provide an uncorrelated asset that does not perform like equities.
If gold continues to trend higher, it can be seen on the weekly chart that gold traded sideways in 2019 with a slight upward bias after the 50-week moving average crossed over the 200-week moving average. As COVID-19 spread through China in late 2019, gold prices started to accelerate higher. Gold trading remains in a bull market with the 50-week moving average staying above the 200-week moving average.
Gold has remained a safe haven during uncertain market conditions. Investors tend to purchase gold when market conditions are uncertain, such as when central banks increase interest rates to combat inflation. Traders considering buying gold might want to assess the potential weakness in global growth, which could lead to a decline in riskier assets.
Following the lockdowns due to the COVID-19 pandemic, inflation increased. To combat inflation, central banks raised interest rates to slow down economic growth. Quarantines and lockdowns halted economic output, prompting central banks to reduce borrowing rates to support economic growth. As demand for goods and services increased, prices rose to unsustainable levels.
Central banks are now focused on inflation, which may have peaked. The US CPI eased slightly in July, mainly due to lower energy prices. Market participants in the US continue to expect more rate hikes in September. While the easing CPI report reduced the chances of a 75-basis point hike in September, the Fed is still likely to raise rates.
When prices are in a smooth upward trend, the implied volatility embedded in option prices remains low. The CBOE Gold implied volatility index shows that gold volatility spiked in early 2020 due to the pandemic, but then prices continued to rise smoothly. Current levels of implied volatility are close to the 200-week moving average, indicating some complacency among options traders.
A decline in the dollar index could support the bull trend in gold prices. The dollar index reached a 10-year high in July 2022. Since gold prices are quoted in US dollars, a stronger dollar creates headwinds for gold prices. If the dollar weakens due to lower US rates, gold prices will decline in other currencies. Gold prices will likely adjust higher to compensate for the decline in the dollar’s value. The future movements of the dollar and the perception of riskier assets will likely determine the bull market in gold trading.
Gold prices have been on an upward trend since the 50-week moving average crossed above the 200-week moving average in 2019. The 50-week moving average remains above the 200-week moving average, indicating the continuation of the upward trend. Implied volatility has declined, suggesting that options traders expect smooth and predictable price movements.
The key to sustaining the bull trend in gold prices is the relative value of the dollar compared to other currencies. If the dollar weakens, there could be additional upward pressure on gold prices, pushing them to new highs. Since gold is quoted in dollars, a weaker dollar should increase the value of gold. Market participants should monitor global central banks to see if there is a continued effort to reduce inflation by raising interest rates. Recent data from the US Labor Department shows that inflation is moderating, reducing upward pressure on the dollar and supporting gold prices.
