GOLD has been one of the standout asset classes this year. As at May 28, gold was up 26 per cent year-to-date, briefly breaking above the US$3,500 per ounce level at the end of April before pulling back. This strong performance can be attributed to several key factors that have converged to create a perfect storm for the precious metal.
One of the primary drivers behind gold’s bullish trend is US President Donald Trump’s so called “madman” strategy, deliberately acting irrationally and unpredictably to gain leverage in trade negotiations and force concessions from trading partners. Escalating trade disputes – such as the recent threat of US tariffs on the European Union – have increased global economic uncertainty and driven investors towards gold as a safe-haven asset.
Another major contributor to gold’s ascent is the persistent weakness of the US dollar since mid-January this year. At the time of writing on May 28, the US dollar had depreciated by 9 per cent year-to-date. Weakness in the greenback makes gold more attractive to international investors, as it becomes relatively cheaper to purchase the precious metal for those holding other currencies.
Concerns over the US fiscal outlook also supported gold’s appeal as a safe-haven asset. In mid-May, Moody’s downgraded the US sovereign credit rating by one notch from Aaa to Aa1. The agency cited the increasing burden of the federal government’s budget deficit with attempts from Republicans to make Trump’s 2017 tax cuts permanent. The Bill passed by the US House of Representatives is expected to add about US$3.8 trillion to the federal government’s US$36.2 trillion in debt over the next decade, according to the Congressional Budget Office.
From a technical perspective, gold has been trading steadily along an upward support line since the start of this year. It has also found support from the 50-day simple moving average, which serves as a proxy for the intermediate-term trend. Since the price formed a peak at the US$3,500 per ounce mark at the end of April, it has been consolidating in a bullish flag while remaining above the key supports. The price action for gold remains bullish and a breakout above the US$3,365 level would likely see a continuation of the uptrend momentum.
In conclusion, gold’s strong performance this year is the result of a confluence of factors, including global uncertainty from trade wars, the US dollar weakness and concerns over the US fiscal outlook. As these conditions persist, we are likely to see gold maintaining its uptrend and resume its bullish momentum should it break out of the current bullish flag consolidation.
The writer is research analyst at Phillip Securities Research
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