Three reasons why the price of gold may rise further

The gold price has risen sharply in recent weeks and even reached a Record of €50,000 per kilo. In the meantime, the price has fallen somewhat, but the turmoil on the financial markets has not yet subsided. For example, the stock markets fell sharply again on Thursday and Friday, while the oil price continues to fall. What does this mean for gold in the long run? In this article, we will discuss three arguments why the gold price could rise even further.

Most investors don't have gold

ETFs' gold stocks are already Up 25 days in a row and reached a record 2,624.7 tonnes this week. Investors are expanding their position in the precious metal, but it is still only a fraction of the total assets. With $140 billion in gold, these ETFs are still relatively small relative to the overall market. For example, less than ten percent of all investors have gold in their portfolio.

In the total mix of all investment portfolios, the precious metal represents a share of less than 2%. If that share were to rise to 5%, which is justifiable from the point of view of risk spreading, it would have a major impact on the gold market. This could cause the gold price to rise further.

Gold funds represent only a small share of the total market of ETFs (Source: Bloomberg)

Recession risk increases

The spread of the coronavirus is having a major impact on the global economy. In China, part of the production has come to a standstill, which has consequences for companies elsewhere in the world. Not only do many products come from China, it has also become an important market. As a result, companies elsewhere in the world are also faced with a drop in demand and supply problems. Measures to prevent the spread of the virus are turning global production chains upside down, production chains that have become increasingly complex in recent decades.

Oxford Economics expects global GDP to be $1.1 trillion lower this year due to the coronavirus. If there is a recession, it will be historically beneficial for gold. In periods when the stock market is falling, gold often achieve a positive return in the end. Also in 2008, when the price of the precious metal initially fell. "With the outbreak of the coronavirus, fears of a new recession are rising again. It is worth mentioning that gold has proven to be a resilient ballast in the last three recessions."Chris Dhanraj of BlockRock told Bloomberg.

On balance, gold appears to be a good hedge in times of crisis (Source: Bloomberg)

Momentum is positive

The Gold price has risen almost in a straight line over the past few weeks. The Relative strength index (RSI) thus rose above 70, a value that suggests that the price of the precious metal has risen too fast. This suggests that the price of gold is going to fall again. However, this indicator for gold has not always proven to be reliable in recent years. Over the past five years, the precious metal has been in 'Overbought' position, but that did not always lead to a correction. On the contrary, in the case of a Relative strength index From 85 or more, the gold price often continued to rise.

Of course, there is always the risk of a flight to liquidity, with investors even Selling gold. This happened, for example, after the collapse of Lehman Brothers in 2008, when the gold price fell along with the share prices. That could happen now, but after the 2008 crisis, gold eventually came out stronger.

Gold appears to be less sensitive to the relative strength index (Source: Bloomberg)

Disclaimer: Holland Gold does not provide investment advice and this article should not be considered as such. Past performance is no guarantee of future results.