At the end of 2019, some analysts predicted that by the end of 2020, the price of gold will rise, amounting to $1,600 per 1 ounce.
They proceeded from the following: a slowdown in the US economy will lead to a decrease in the yield of treasuries, forcing dollar to become cheaper due to the expansion of divergence in the global and US GDP growth. Moreso, in 2020, the S&P 500 index will not be able to boast the same success as in 2019.
Nonetheless, the precious metal did not put plans on hold, and soared to seven-year highs amidst the escalating tensions in the Middle East.
Geopolitics has become a new trump card for gold, allowing it to achieve its goals much earlier than expected.
However, the situation quickly cleared up. The risks of an armed conflict between the US and Iran decreased to a minimum, and the "bulls" for XAU/USD were forced to descend from heaven to earth. The price of gold has rolled back down to the levels of $1,535-1,550 per ounce, where an intermediate "peak" was recorded in September 2019, and which has now turned from a strong resistance zone into a support area.
You can't go too far with geopolitics alone.
According to experts at the Australian financial company, Macquarie, geopolitical risks alone will not be enough to support the upward trend in the gold market.
They said that "After a sharp increase from a shock event, the price of the precious metal usually tends to return to the previous level of quotes."
Experts cited the events of September 11, 2001, as well as the attack on an oil refinery in Saudi Arabia last year as examples. During these times, the price of gold also rose sharply, however, it could not hold the positions it had won. Once the effect of the shock event ended, the price of the precious metal adjusted.
"In order for the upward trend in the gold market to continue for a long time, a simultaneous combination of several factors is necessary. For instance, the weakening of the US dollar, low interest rates and rising inflation expectations, as well as the rise in oil prices and increased concerns about the slowdown in the global economy," Macquarie representatives said.
It is noteworthy that during the last conflict between US and Iran, the dollar behaved quite strangely. This prompted some analysts to think that the US currency has lost its traditional role as a safe haven asset.
Dollar, as a rule, grows with gold when the world is restless. If we judge by the USD index, which shows the dynamics of the dollar against a basket of major currencies, after the assassination of Iranian General Qassem Suleimani, the dollar practically did not move and even began to strengthen as soon as the conflict between the two countries began to fade.
"It seems that investors can't decide whether they should consider the dollar as a safe haven or as a risky asset. The problem is that you can't sit on two chairs at the same time, although that seems to be what happened with the dollar," Richard Benson of Millennium Global said.
"The reasons for this behavior of the dollar should be found in US interest rates, which at this stage, are the highest among developed countries. They increase the attractiveness of the dollar, as it provides both income and security, being the most liquid currency in the world," he added.
What to expect from gold next?
After sharp movements, the precious metal market usually determines the extreme points of the range in which the price further fluctuates, and consolidates until new introductory prices are received. At the moment, these points are $1,540 and $1,610 per ounce.
After testing the lower limit of the range, it is expected that another attempt to increase gold's price will follow in the near future. However, graphical analysis suggests that in the area above $1,580, quotes may encounter quite strong resistance, thus, you need to prepare for the fact that the peak in the $1,611 area may last for several months before the price goes further up.