Not only are gold prices trading near their highest level in seven years, but one market analyst notes that the rally has occurred in the face of significant headwinds: a stronger U.S. dollar, record equity valuations and shifting market sentiment.
In a report Thursday, Ole Hansen, head of commodity strategy at Saxo Bank, said following gold’s break above $1,600, there is enough momentum to push prices to $1,650. Hansen’s comments come as gold extends its winning streak to five consecutive sessions. April gold futures last traded at $1,623.50 an ounce, up 0.74% on the day.
“With the metal moving higher, despite the mentioned headwinds from other markets, it is difficult to see what at this stage can halt or pause the rally,” he said in the report.
Hansen said that loose monetary policy is helping to counter the negative correlation between a strong dollar and gold prices. He added that there are expectations that central banks will continue to loosen monetary policy as the coronavirus continues to impact the health of the global economy.
“Central banks and governments will do whatever it takes to support a return to trend growth later this year,” he said.
Wednesday, the Federal Reserve January monetary policy meeting minutes showed that the central bank is focused on holding interest rates at their current levels. However, markets are pricing in at least two more rate cuts this year. U.S. real yields continue to trade in negative territory, falling to -9 basis points Wednesday.
Looking at equity markets, although investors’ sentiment still remains relatively positive, Hansen said that record valuation in equity markets is not necessarily a negative for the gold market. He added that equity investors could turn to gold to hedge against a potential correction.
“We believe that the combination of additional rate cuts, increased stimulus, negative U.S. real yields and U.S. stocks back to record levels will continue to drive strategic diversification and safe-haven demand,” he said.