The second wave of Covid-19 is here and while it makes gold’s potential even better in the long run, it’s likely to mean a sharp decline beforehand.
It might be tempting to focus on something else, to look the other way, or to limit testing, but the difficult fact is that the Covid-19 pandemic is developing after a several-week-long pause. There are new highs in the number of new daily cases both: globally, and in the U.S.
The second wave is not yet present in Europe, but please keep in mind that it could become a severe problem very fast. As the entire world has more and more coronavirus cases, and the economies are being reopened, it will be very hard to avoid the second wave in Europe.
The new daily cases in Israel clearly show how a supposedly contained situation can easily get much worse in a relatively short period.
Why is this important from the gold investment and gold trading point of view? Because the markets appear to have viewed the March price moves as a one-time event triggered by also a one-time event. And the markets are just starting to wake up to the fact that it doesn’t work this way at all.
The number of searches for the “coronavirus cases” phrase in the U.S. is on the rise again, but it’s not yet significantly higher than what we saw in mid-March. People are not yet panicking once again, but the trend is already in place.
The re-opening schedules are being canceled and some small lockdown measures are being introduced but their extent is not yet significant. People are already starting to get that they were way too optimistic regarding the recovery, but we are early in this process. The above search chart from Google Trends indicates that and performance of the general stock market confirms it.
The huge volume on which the S&P 500 reversed on Friday was likely an indication of the change in the market sentiment, which is still remarkably positive compared to what’s going on. It’s as if we were not in the early part of the biggest economic disaster of the last several decades.
It seems that the markets will soon catch up to the (unfortunately – grim) reality and decline much more. In the early part of the move, the precious metals market is likely to decline, just like it had declined in the first half of March. It’s likely to then rally more profoundly, and soar well above the 2011 highs, but it’s unlikely to happen without a slide first.
The situation in the USD Index continues to support the bearish case in the next 1-3 weeks, but at the same time it also explains why gold hasn’t plunge just yet.
From the short-term point of view, the situation in the USD Index was very similar to what we saw in early March. At this time, it’s clear that it’s not 100% similar, but that there’s a significant difference when it comes to timing and volatility. The situation is now developing less dynamically, as the authorities are reluctant to impose new lockdown measures, knowing how big declines in stocks followed, and gold was reacting primarily to the economic changes – people ran for the hills and then craved the safety of the U.S. dollar – at least initially. Right now, the situation is not yet critical in people’s view, which is most likely why the USD Index is moving up in a steady manner instead of moving up sharply.
What is key here is that the situation can change quickly, just as it changed in March. Now the states are looking at each other and nobody wants to be the first to seriously limit the economic activity let alone force people to stay home. But as the cases grow to new highs, and as the number of deaths grow, people will likely get scared once again, and the more severe lockdown measures are likely to be re-introduced. That’s when the USDX would be likely to soar with vengeance, and gold would be likely to slide – at least initially.
Technically, the USD index didn’t manage to break above its mid-June highs and instead it reversed on both: Thursday and Friday. Consequently, many traders are likely viewing the June rally as a zigzag – a correction within a decline. We disagree with this interpretation, because of the favorable long-term chart, the similarity to what happened in February and March, and the way in which the new Covid-19 cases are growing in the U.S..
Summing up, the precious metals market is likely to decline in the short term (and only in the short term! gold is likely to soar in the following months!) along with the big decline in the stock prices and the decisive upswing in the USD Index. This is quite likely to correspond to renewed lockdown orders, which are just starting to emerge. Given how quickly the pandemic is developing, the above actions and price moves are likely just around the corner.
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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits: Analysis. Care. Profits.
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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
This article was originally posted on FX Empire
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