The year 2021 is contemplating ups and downs in the evolution of the price of gold. The latest correction took place during the month of June, in which the precious metal fell more than 7%, in what was its biggest monthly price drop in the last decade. The monetary policy of the Federal Reserve, the appreciation of the dollar, the competition from other assets… what were the causes of this fall in gold in June?
Indeed, last June the price of gold fell by more than 7%, a downward movement that was the sixth largest since the beginning of 2010. Various factors came together to accelerate a fall in the price of which the metal precious has already recovered.
As Jordan Eliseo , head of research at Australia’s Perth Mint , points out , two of the other top 10 monthly gold price declines (the one in February this year and the one in November 2020) are part of the current cycle of corrections that began mid-August 2020, once gold recorded its all-time high, exceeding $2,050 an ounce.
Although it might seem that gold has not fulfilled its role as a refuge asset during the Covid-19 pandemic, since its price has fallen between June 2020 and 2021, the truth is that gold is still 16% lower. above the level it was in January 2020, when the world began to recognize the threat of the coronavirus.
Also, gold is 50% above its price in September 2018 , which was the time when central banks in developed countries began adopting dovish monetary policies in an attempt to stimulate weak levels of economic growth.
In any case, from the Perth Mint they emphasize that “although the long-term gold revaluation figures continue to be impressive, there is no doubt that the recent weakness has affected the confidence of certain segments of the precious metals market. There was a notable decline in bullish positions in the futures market during the month of June, especially in recent days, while ETFs witnessed some capital flight .
All of this has weighed on investor sentiment towards precious metals, while technical indicators have fallen to levels that typically coincide with bottoms.
The Perth Mint report agrees with most analysts in citing the Federal Reserve Board meeting in June as a trigger, in which the possibility of a rise in interest rates in 2023 was noted, sooner than expected.
“It cannot be said that the Fed was in a hurry to withdraw the extraordinary stimuli it is injecting into the markets and, indeed, at its June meeting it reaffirmed its commitment to buy $120 billion a month in Treasury bonds and mortgage-backed securities. , in addition to maintaining interest rates between 0 and 0.25%” , warns Eliseo.
However, the markets’ radical interpretation of this change in tone at the Federal Reserve served to boost the dollar (which has risen 3% since the end of May) and to cause real bond yields to rise, which which has contributed to the correction in the price of gold.
The Perth Mint report points to five factors that have contributed to this historic 15% correction in the price of gold since it registered its all-time high in August 2020:
Stabilization of real yields on treasury bonds
Over the long term, the price of gold is closely correlated with real bond yields. Since gold peaked in August 2020, real yields on 10-, 20-, and 30-year US Treasury bonds have grown, or at least are less negative than nine months ago.
Rise of the bags
Since the Covid-19 pandemic caused the stock market crash in March 2020, capital markets around the world have registered an unprecedented rally: the Australian ASX 200 is up more than 50%, while the S&P 500 of the New York Stock Exchange has nearly doubled.
In the first six months of 2021, this latest US stock market index has risen by close to 40%, in what has been one of the biggest ‘rallies’ in the last 50 years.
Given such a rise in markets, it is not surprising that investor appetite for gold has waned in recent months, putting downward pressure on the price of the metal.
Growing optimism about the economy
Investors’ optimism regarding the rate of recovery of the global economy has also grown in recent months. The vaccination of the population in most developed countries and the fiscal stimulus measures that have supported households and businesses have contributed to this optimism.
Global growth forecasts are constantly being revised upwards, while US consumer confidence soars, reaching levels it was 18 months before the pandemic.
Bitcoin and cryptocurrencies
The year has also been very positive for bitcoin and other cryptocurrencies, despite the recent 50% correction in the price of the main virtual currency.
On the day the gold price peaked, in early August 2020, bitcoin was trading at less than $12,000. Subsequently, it multiplied by five, reaching $65,000 in mid-April of this year.
Even discounting the 50% correction, the price of the cryptocurrency is more than triple its price when gold peaked. This has attracted the attention of many investors, especially younger ones, which has ended up weighing on gold.
Excess of optimism in the precious metals markets
The last factor that has influenced the correction of the gold price is what in the Anglo-Saxon countries call ‘froth’: an excess of optimism among investors, which usually precedes the bursting of a bubble.
This would mean that gold became too popular an asset and made headlines when it broke above $2,000 an ounce. The optimistic sentiment among investors and analysts was the usual sentiment that occurs just before an asset undergoes a correction.
According to Eliseo, the good news is that this excess of optimism has dissipated and, although this does not mean that the market has bottomed out, the situation is more balanced, which is a positive sign.