Can gold prices retain their shine as central banks tighten strings?

Gold prices enjoyed a stellar rally in the immediate aftermath of the 2008 global financial crisis. As the markets across the world plunged, investors sought the safety in gold, often dubbed as a safe haven asset.

Gold prices rose to highs of $1920 by late 2011 and have, since then, been easing back. The gains came as central banks made an effort to revive their respective economies. Interest rates were cut to zero and in many cases, interest rates were negative. Central banks also embarked on launching monetary stimulus policies, known as quantitative easing (QE), in order to boost the economy.

Since the peak in 2011, gold prices have been gradually declining. In December 2015, gold prices posted a bottom, touching lows of 1046.00 before starting another leg in the rally.

In the past few years, as the U.S. economy started to improve, the Federal Reserve slowly started to taper it’s QE program. The path towards normalization eventually led the Fed to hike interest rates for the first time in 2016. The following year, the Fed also started to unwind its balance sheet, albeit at a gradual pace.

Besides the Fed, other central banks also joined hands to begin tightening monetary policy. The Bank of Canada was the next central bank to have hiked interest rates, surprising the markets with two rate hikes in 2017.

The Bank of England also hiked interest rates, albeit for other reasons. As UK’s inflation overshot the central bank’s 2.0% inflation target rate, the BoE was forced to hike rates in a humble effort to cool inflation.

The European Central bank was next as it announced a taper to its QE program. Markets expect to see the ECB starting its path towards normalization by 2019 end. More recently, the BoJ’s announcement to cut down on its longer term Japanese Government Bonds also took the markets by surprise.

While gold has managed to perform strongly in the crisis-era, the big question for investors now is whether the safe haven asset will continue to rise. Until a few years ago, gold enjoyed the top status as a safe haven asset, the rise of cryptocurrencies has posted a considerable threat to gold.

At the time of writing, the precious metal is on track to post a second monthly gain. The monthly chart for gold prices shows that from a technical perspective, price action is slowly shaping up to form an ascending triangle pattern.

 

 

Price is within reach of the major resistance zone near 1391 – 1351 level. A successful breakout above this level could indicate further gains in the precious metal. The next major technical level for gold prices is seen at 1558 where resistance is likely to be established.

However, there is an equal downside risk. In the event that gold prices fail to break the resistance zone, we could anticipate a downside breakout. This could be validated on a breach of the rising trend line.

A close below this trend line could indicate a downside move in gold prices. To the downside, technical support is seen near the 1079 – 1046 region, which was briefly tested in November and December of 2015.

Global equity markets have been faring better and amid renewed optimism across most of the G7 economies, investors are likely to find better yield in other markets rather than in gold.

Still, with a lot of economic uncertainty, gold is likely to remain in favor at least until there are enough indicators that will suggest an improvement to the global economy.

For the year ahead, gold prices are likely to maintain the range within the 1391 – 1351 level with further gains expected on a breakout above this level. Alternately, we expect gold prices to maintain the range below the resistance level.