XAUUSD: UBS Analyst Explains Why Gold Price Just Jumped to All-Time High

Gold price (XAUUSD) made history today as its price rose to its all-time high. As at 06:00 (GMT), the metal is trading at $1935, which is a few points below the intraday high of $1,945. By this rally, the price moved above the previous all-time high of $1,918, which it reached in 2011.

Gold Price Rallies as US real yields drop

The current rally of gold price is mostly because of the low interest rate policy of the Federal Reserve and the subsequent open-ended quantitative easing policy. The impact of these policies is that the yields on US treasuries has dropped to historic lows.

When yields drop, it discourages saving and leads to a weaker dollar and inflation in assets. Today, the US dollar index is down by 0.25% and the currency has dropped sharply against other currencies like the yen, Swiss franc, and the euro. In a note to investors, Vivek Dhar, an analyst at Commonwealth Bank of Australia said that the low yields of the ten-year has been the most important factor in the current trend of gold price. He said:

“The negative relationship between long term US real yields and gold futures has held up fairly well over the longer term. That is because when long term US real yields increase, gold is less attractive relative to US interest bearing securities since gold has no income earning ability.”

This view was also shared by Mark Haefele of UBS, who said:

“While we think gold will continue to be supported by rising geopolitical tensions, in our view the primary drivers of the gold price are its negative correlation to real interest rates and the dollar.”

The chart below shows the divergence between gold price and the US dollar index.

Meanwhile, Joe Foster, a fund manager at VanEck cited the rising number of coronavirus cases in the United States and the likelihood that the economy will take longer to recover. He said:

“The latest move is being driven by the Covid outbreaks we are seeing in the US, and the realisation that the recovery is going to be longer and harder than many people were expecting a few weeks ago.”

Meanwhile, the rising tensions between the United States and China has played a role. During the weekend, US diplomats moved from their offices at Chengdu. The Chinese military also started new exercises at the South China Sea. In a note on Friday, an analyst at UBS said:

 “US-China tensions continue to escalate, which prompted a risk-off move in markets on Thursday and Friday.”

XAUUSD Technical analysis

The long-term chart shows that gold price has been in a strong upward trend since December 2015 when it bottomed at $1040. Since then, the price has jumped sharply, forming an arc (cup and handle pattern). The cup section ended today, when it tested the previous high at 1918.

The price remains above the 50-day and 100-day exponential moving averages while the RSI has moved to the highest level since 2008. Therefore, although gold price will likely continue to rise, it is possible that it will decline to complete the cup and handle pattern.

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Gold Price forecast

“US-China tensions continue to escalate, which prompted a risk-off move in markets on Thursday and Friday.”