Dynamic price increases that can be observed since mid-August on the gold market are not stopping. On Friday, on the spot market a new 27-year high was reached at 739.50 USD per troy ounce. High prices of the yellow metal are still caused by the weak American dollar, which continued to decline against the euro and the British pound. Prices of gold, as an alternative investment, are negatively correlated with the greenback and move in the opposite direction.
Prices of gold increased by over 1.5% since Thursday while they appreciated 12.0% in the last month. A positive effect on the yellow metal had Thursday’s publications from the US housing market. New Home Sales in the United States declined by 8.3% on a monthly basis to 795K, which is the lowest level since 2000. The gravity of the problem showed the home prices decline by 7.5% on a yearly basis. That is the biggest drop since 1970. Those publications increased the possibility of another interest rate cut by the Federal Open Market Committee. The last federal funds rate cut by 50 basis points to 4.75% was the first since 2004, when the Fed started tightening monetary policy.
It has to be noted that prices of gold keep going up despite the 16% supply increase by Central Banks compared to last year. Banks flooded the market with 460 tons of the yellow metal coming close to the agreed 500 ton limit (Central Banks Gold Agreement). At the same time, prices are affected by a high level of investment demand. Also, news has been heard that Russia is buying the metal to make up its own reserves.
At this moment, both, fundamental and technical factors, favor investors who opened long positions. In the mid-term, prices can reach the 770 – 780 USD level. Higher, an important supply barrier should be at the psychological 800 USD level and the historic all-time high at 850 USD per troy ounce reached in 1980.
Tomasz M?czka
tomasz.maczka@xtb.pl
X-Trade Brokers Dom Maklerski S.A.