This year, the price of gold has
declined by more than 5%. The price started the year at $1320 per ounce and
reached a YTD low of $1160 in September. Since then, the price has slowly moved
up to a high of $1250.
As you already know, gold is an
interesting metal in that it is used mostly for investment purposes. Most people
who buy the commodity do so to hedge against inflation and other major market
happenings like disasters. The idea is that when there are uncertainties in the
market, investors will move to gold as a caution. A contrary idea is that gold
is a hedge against a stronger dollar. As such, when the value of the dollar
increases, it pulls down the value of gold.
This year, global uncertainties
have increased. These started with the ongoing trade conflict that threatens
businesses from around the world. Other issues that arose this year were on the
US decision to leave the Iran nuclear deal and the decision to abandon a
nuclear treaty. The latter threatens the world with an escalation of the
nuclear weapons development. All this has seen the level of global volatility
increase as evidenced by the S&P VIX index that has risen by more than 50%.
Therefore, the key conclusion that can be made is that gold is not a hedge
against uncertainties. Instead, it has an inverse relationship with the dollar.
This year, the dollar index has risen by almost 5%. This relationship is shown
in the chart below.
From a technical perspective,
gold’s price is along the 28-day and 14-day EMA while the RSI and MACD are
moving down on the six-month chart. This is because in the past few days, the
price of the metal has eased a bit after hitting the $1250 level. The next
major movements will likely be caused by the Fed statement in the coming week. If
the Fed sounds dovish, the pair may continue moving up and vice versa.