Is Gold Losing Its "Mojo" Among Investors?

Since reaching all-time highs of $2,075 last year, gold is in a corrective phase as the Covid crisis provoked a stinging risk aversion, with investors desperately looking for security. However, according to a SAXO Markets analysis, this correction is to take longer as cryptocurrencies, lower inflation expectations, and the dollar trading strongly are dwindling gold investment’s mojo. 

Gold to recover by end of 2021 or 2022

Technical analyst Kim Cramer Larsen asserts that upon breaking the rising channel from the March low, “gold traded down in almost straight line to retrace 61.8% of the March to May rally at $1769/oz.” Also, she says, the price is likely to deteriorate to around $1734 –the 76.4% retracement– given late June’s low at $1761 and previous support at $1755. 

“If support holds the prospect for a stronger recovery above resistance at $1797 could see it return to a band of moving averages in the $1831-35 area. RSI is in bearish sentiment with no divergence meaning the short-term risk is to the downside.”

In fact, analysts believe that gold could recover by the end of this year or in 2022, highlighting any investment  interest as an ideal long-term asset that can offer protection against a potentially adverse economic outlook. 

Also, other “risky” asset classes such as bitcoin are on the up. In 2020, the correlation between gold and bitcoin reached above 0.5 within a 60 day period, according to Coin Metrics data. Still, despite 10 years in the world's financial arena and nearly a trillion dollars in capitalization later, there seems to be a consensus that nothing beats the former. 

Good business in the long haul

On the other hand, the crisis has bred a reality that, despite the positive talk and glimpses of recovery, it is pervaded with risks. This outlook, analysts assure, makes investing in gold very appealing in the long haul.

How so? Investors can take advantage of the possible price cuts that may occur, as this scenario of economic improvement and recovery could be seen as “an opportunity for those who have not been able to jump on the bandwagon in recent times,” analysts at Degussa firm assert.

They insist on the long-term bullish bias of gold and, regarding bitcoin and its impact on gold investing interest, analysts emphasize that they are complementary investments. “That great volatility that bitcoin is increasing the exposure of gold.”

Waiting on Basel III, EU’s back international framework 

Many eyes are on Europe’s most recent banking rules that kicked in on July 8, known as Basel III. They are touted by many as “the new dawn for gold” since they could lead to a “major liquidity squeeze,” sending gold prices up with a bang. 

“Whether or not that will be the eventual outcome, there is no doubt the rules will shake up the industry, especially when it comes to how unallocated, or so-called ‘paper’ gold is being treated from a risk perspective,” states the analysis.

But what is more critical is that under Basel III rules, allocated gold –stored gold owned by investors– will be classified as a zero-risk asset, while the unallocated or “paper” gold that banks naturally deal with, will not. 

With Basel III, European banks must meet new liquidity requirements defined as Net Stable Funding Ratio (NSFR). According to the latter, an 85% Required Stable Funding (RSF) –the amount banks need to fund their assets– “needs to be held by banks against the financing and clearing of precious metals transactions in unallocated gold.”

Since it previously was zero, this will increase the cost of holding unallocated gold leading to potentially lower activity, while making physical gold more attractive and less exposed to hedging or selling activities.

On the date of publication, the author not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer.