01.04.202013:36 Forex Analysis & Reviews: Gold will get its way

Despite short-term sales amid the strengthening of the US dollar, the medium and long-term prospects for gold remain "bullish". And it's not just the old patterns that allowed the precious metal to soar to a historic high of more than $1,900 per ounce in 2011. This is due to the market conditions of the physical asset and the special status of gold, which is traditionally in high demand during periods of massive weakening of the main world currencies.

The recession of the global economy forces central banks to use the entire arsenal of monetary expansion, and governments to resort to large-scale fiscal incentives. As a result, the weakness of monetary units is fueling interest in buying XAU/USD, as well as the understanding that the ratio of total debt to GDP will grow rapidly.

The strength of the "bullish" trend for precious metals is evidenced by the fact that investment demand for gold is increasing, while demand for jewelry, on the contrary, is decreasing. In 2013, when the analyzed asset fell on the territory of the "bears", everything was the opposite. The rise in prices to the psychologically important mark of $1,700 per ounce contributed to an increase in stocks of specialized exchange-traded funds to a new record peak of 3,000 tons, which is equivalent to $157 billion. Approximately $78 billion of them are associated with American ETFs, $72 billion – with European ones. The largest fund is SPDR Gold Shares with assets of $48.3 billion, the second place with $19.6 billion is iShares Gold Trust.

Despite the fact that the largest buyer is leaving the market, the Bank of Russia, which has spent $40 billion on the purchase of gold over the past 5 years, the "bulls" should not worry about this. The share of precious metals in the reserves of the Central Bank of the Russian Federation exceeds 20%, and the regulator clearly does not want to increase it at a time when reserves will be reduced.

Dynamics of the Bank of Russia's gold reserves

If the investment demand for precious metals is all right, then the interest in buying jewelry due to the coronavirus has seriously suffered. First of all, this applies to China, which, according to the World Gold Council, consumed about a fifth of all physical gold in the world. Total demand in 2019 was estimated at 4,356 tons.

Dynamics of retail sales of jewelry in China

However, the main driver of the growth of XAU/USD quotes, as in 2008-2011, is the ultra-soft monetary policy of the Fed and other central banks of the world, the weakness of their currencies and low rates of the global debt market. In such conditions, gold feels like a fish in the water. The uncertainty around the coronavirus and the Fed's desire to use currency swaps and repo operations to dampen external demand for the US dollar allow the "bulls" for the precious metal to be optimistic about the future.

Technically, the "surge and reversal with acceleration" pattern continues to be relevant on the daily chart of gold. The unsuccessful attempt of the bears to take the quotes below the trend line of the initial stage and leave them there indicates the weakness of buyers. The chances of recovery of the upward trend are high, so the growth of the precious metal above $1,640-1,645 per ounce makes sense to use it to form long positions.

Gold, the daily chart