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 in the shorter term.
It might be tempting to focus on something else, to look the other way, or to limit testing, but the fact is that COVID-19 is spreading again after a several weeks of respite. There are new highs in the number of new daily cases both globally and in the US.
The second wave is not yet present in Europe, but keep in mind that it could become a severe problem very fast. As the entire world has more and more coronavirus cases, and economies are being reopened, it will be very hard to avoid a second outbreak in the region.
Why is this important from the point of view of investing in and trading gold? Because markets appear to have viewed the March price moves as a one-off that was also triggered by a unique set of circumstances. 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 words “coronavirus cases” in the US is on the rise again, but it’s not yet significantly higher than it was in mid-March. People are not yet panicking again, but the trend is already in place.
The schedule for some reopenings has been changed some small lockdown measures are being introduced in some US states, albeit on a modest scale. People are already starting to understand that they were far too optimistic regarding the recovery, but we are early in this process. The above chart that shows searches 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 as it did 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 US Dollar 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 plunged just yet.
From the short-term point of view, the situation with the USD Index was very similar to what we saw in early March. But this time, 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 US 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 steadily, rather than 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 economic activity, let alone force people to stay home. But as cases reach new highs, and as the number of deaths grows, people will likely get scared once again, and more severe lockdown measures are likely to be re-introduced. That’s when the dollar index 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 US.
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 a big decline in the stock prices and a 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.