The price of gold on the stock market is dependent on demand: a larger number of buyers drives the price up. Gold is generally seen as a “safe” investment, and demand goes up during times of political, security, and social turmoil. It is worth noting that the situation in the US plays a very important role in the price action of gold because the country is the base of the world’s largest stock exchanges and companies with the highest capitalization.
These are good indicators that the rally has run out of steam. The price of gold fluctuated sharply in January, following the escalation of hostilities between the US and Iran, the impeachment proceedings in the US, and the uncertainty surrounding the corona virus. However, these issues are now far less contentious. The US and Iran have ceased trading attacks; the impeachment proceedings have concluded; and there is now more information on the virus, and several promising treatment protocols have been established.
The US stock market has also hit multiple highs in 2020 alone, and is expected to grow further, following the conclusion of trade deals with China, and with Canada and Mexico. The Federal Reserve has announced that they no longer intend to cut interest rates further, and that they estimate inflation rates to be at record lows.
The psychology of the market also indicates greater trust in the US business environment: the University of Michigan revised its consumer sentiment index up to 99.8 for January 2020, easily beating a forecast of 88.3. These mean that investing in other assets has started to look more compelling than the “safety” of gold.
Lastly, cultural factors play a role in the waning of demand for gold. With the completion of the South Asian wedding season and of the Chinese New Year festivities, the purchasing of gold for jewelry and other personal use is expected to slow down in the next few months.
A technical analysis of the price action of gold confirms this tendency for it to turn bearish. From December 26 to January 15, the price ranged from $1,495 to $1,558. It opened at $1,497 on December 26 and closed at $1,556 on January 15. That represents a range of +$63 from the lowest point to the highest point, or +$59 from market open to market close over the course of the 14 trading days.
Meanwhile, from January 16 to February 4 (14 trading days), gold ranged from $1,546 to $1,593 (+$47), but opened at $1,556 and closed at $1,552 (-$4) on February 4. This points to an end to the trend of constant day-on-day and week-on-week growth in price.