i. During recession everyone runs towards gold.
ii. Trendlines and demand and supply zones are very efficient to trade gold.
Gold is one of the most highly traded financial assets. Each time something goes wrong in the economy, investors flock to put their money in gold as it's considered to be a natural hedge. If you trade gold then you need to use technical and fundamental analysis.
What is that special asset? This special asset is gold.
Important gold facts you need to know
1. Gold is considered as the oldest form of currency
The earliest known use of gold was in 643 B.C. And since then, it is considered as the most valuable metal.
2. Gold is the single metal that has its use in almost every sector of the industry
It is used in electronics, aerospace, jewellery, finance, and a lot more.
They say gold is the only metal that is accepted in every corner of the world.
So if you are stuck somewhere with no cash but you luckily have your gold bracelet, then you got hope.
3. Gold is rare
The most important thing with gold is that it is not available in abundance; it is rarer than you think. Gold is a metal that is mined from the earth’s core.
4. How much gold has been mined till today?
According to the world gold council, humans have mined roughly 190,000 Tons of gold, which equals 70% global recoverable reserves.
5. How much gold is still left?
The World Gold Council estimates that remaining reserves worldwide amount to just 30% of what’s been mined already.
This tells us that the demand for gold is increasing, and its supply is getting lower.
And according to the principle of supply and demand, higher demand and low supply lead to an increase in the price of that asset.
These were few facts about gold, which tells us why the gold is still undervalued and also its price need to increase. But that’s not the real secret which I talked about. So, what’s the real secret?
Everyone in the world is expecting the recession to hit in the coming few months, but no one knows when.
If you have proper knowledge and understanding of this, you can make a profit in recession.
You might be thinking about how can you make a profit in a recession when the whole market and economy are going down?
Very few people are aware of the fact that most numbers of millionaires are made during the time of recession.
There are thousands of people who create a lot of fortune during the times of recession, and you can do it too if you have the proper knowledge of how this thing works.
Many of you must have heard about the great recession which happened in 2008.
What caused a strong economy like the USA to get into a recession?
There are various reasons which can cause an economy to get into a recession. Different acts occur throughout the year, and some of them are carried from the past.
The economy gets into a recession when there is a decline in the economic activity of a country.
And in simpler terms when the GDP of the country declines at an unusual rate. In times like this, the countries employment rate decreases, and its unemployment increases as there is a shortage of demand because the people do not have enough money to spend and hence cause the production rate to fall.
There are different factors responsible for this, like, the trade wars, increasing debt, currency war, and much more.
The next crisis can start out of nowhere. It can be triggered by the failure of a financial institution, a made-at-home political turmoil, or a severe geopolitical event.
It is very hard to predict which factor is going to lead the countries economy towards the recession because it can be anything.
The 2008 great recession was caused due to subprime mortgage history and an increase in debt. Subprime mortgages are home loans granted to borrowers with poor credit histories.
A recession is not something that directly hits the economy. It has few warning signs, which indicates that a recession is about to come.
So, a slowdown in the economy occurs first, which, when not solved, leads to the recession.
There are different monetary tools that the central banks use to deal with the slowdown and try to avoid a recession.
1. Monetary policy ( lowering or increasing interest rates)
2. Quantitive easing (printing new money)
You must have heard about the phrase that history repeats itself, but no one has told you when and why it is repeated.
So, to make things very easy and clear to understand, I have divided this analysis into three parts.
First, I am going to explain to you what has happened in the past. And then what is the present condition of the market and finally what we can expect in the future.
In 2008 the world’s biggest economy, the USA, was struck by the recession, and it affected the whole world differently.
To deal with it, the US government and the FED introduced monetary policy and different tools.
As there was not enough money in the market, the fed started lowering the interest rates and made borrowing cheaper. They took the interest rates to almost zero and tried to fuel the market.
When this was not enough, the fed then started quantitive easing (printing money). They printed a huge amount of money and injected into the market so that the economy can do well.
During this time, the wallstreet was bleeding, and all the major companies were affected by this. So, the US government and the FED bailed out the top companies out of this, and the things started to get better.
But, the problem with this is, the overall debt on the US increased, and it has almost tripled since 2008.
In the US alone, federal government debt now stands at $21 trillion. It was $8 trillion in 2006. And the debt is still increasing. Too much debt is not good f or any country.
How did gold surge during the time of recession?
As the stock market was bleeding hard during 2008, a lot of investors initially panicked at first as they did not know what should be done.
As the interest rates of every country were low, it wasn’t attractive for the investors to invest in stocks or keep their investments in USD.
So, they invested all of it into gold, as gold has a history of safe performing assets. So, as a lot of people invested in gold, the gold becomes attractive, and as a result of it, its demand increased, which caused the price of gold to increase.
The present scenario is very similar to what happened in 2007-2008. Globally, most country’s economies are not doing well. More than six countries lowered their interest rates to negative.
The conditions are such that the government is paying interest to the borrowers so that they can borrow money from the government and run the economy smoothly.
There are a lot of conflicts going on between the countries. The world’s two biggest economies have a trade war going on, and economists fear that this can further lead to currency war or even worse.
Whenever the situations get worse, it will make the safe havens like gold attractive, and the investors will again shift towards gold for shelter.
The steps which the government and fed took to get out of the recession caused a lot of abnormalities globally.
The fiscal and monetary policies were sold to the public with a promise that, collectively, they would benefit the real economy (aka Main Street).
The only people that actually benefited from either policy were the private financial institutions that were bailed out by the government and anyone with wealth that was in a position to borrow money at no cost to buy real assets such as stocks and real estate.
The real economy since 2008 has been feeble at best. True, unemployment is low, but the quality of those jobs is subpar, and real wages have not moved up in tandem with the actual cost of living.
In other words, Main Street is not doing well, and wealthy people are getting a lot wealthier and causing the wealth gap between the people to increase.
The present technical scenario of the gold chart
The gold chart has been rallying from May 2019. It has surged over 25% this year. From 22 May 2019, we observed a momentum change from sellers to buyers, and the market then started to move higher.
The market then started correcting when the price of gold reached the 1400 mark. The market corrected for a month and then finally moved higher on 31st July.
The price moved higher because the fed cut its rate for the very first time this year, and the chairman said that if needed, they will cut the rate again.
This caused a lot of investors to get towards gold, and hence a lot of buyers got into gold, pushing its price higher.
In the chart below, I have market important areas where the buyers came in.
Currently, the price is correcting and has almost reached the area where a lot of buyers got in. The price can retest this level, and if there are enough buyers, then the price can again move up.
I believe this area holds a lot of importance for gold traders.
We have another interest decision this year, which is to come on 12th Dec 2019. It is most likely that we see another rate cut this year.
And if this happens, we will see a lot of buyers to get in gold, and the price may go higher and break the previous high of 1900.
After years of pretense that interest rates were going to be raised because the economy was on a solid footing (a consistent messaging exercise by the central banks, supported by the talking heads of Wall Street), the Fed finally came clean.
Interest rates were not going any higher, and the excess money that had been pumped into the system was staying put.
No sooner had that messaging sunk in with the markets, that they began to signal a possible interest rate decrease.
That decrease will come, if not now, certainly before the 2020 election. It is extremely doubtful the Fed will have the backbone to resist the influence of both Wall Street and a government that wants to get re-elected.
And that’s where gold comes in. Always the canary in the coal mine, the price of gold begins to move much higher just when the potential decrease of interest rates becomes a real possibility.
My prediction is it will continue to move higher, much higher, over the next few years. The fact of the matter is that we are in a forever near zero-interest-rate environment.
It’s the same trap Japan fell into 30 years ago, and it’s where they remain.
When the next crisis inevitably arrives (it could be in months or years, no one knows), the Fed will have no ammunition left to create a safety net as it did a decade ago.
I believe that when the dominoes start to fall, some new versions of quantitative easing will be introduced.
History has shown, when a country’s government resorts to the endless printing of money, its economy goes into hyperinflation mode, and the currency of that country becomes worthless.
When that day comes, gold, in dollar terms, will go through the roof.
The previous resistance of 1900 will just be the start of a gold rally if the price is able to break that resistance.
We can see the price to go even higher, and finally, the gold will get what it actually deserves. Based on my research, I predict the price of gold to reach $5000 mark.
How to trade gold?
Always remember that trading is a lot different than investing. In trading there are different things which you have to pay attention too.
You cannot overleverage your account and also have to maintain the margin.
Yes, the price is going to go high, and for investors this is the best time to buy gold.
But for the traders, they have to be exact with their entries and also consider different alternatives and forex tools to protect their account so that they can profit when the price actually rallies.
In the chart above I have mentioned two zones for buying, you can enter a buy trade at the zone and keep a stop loss few pips below the zone.
If there is no interest rate cuts this month and if the trade deal make progress, it is most likely that the first buyers zone won’t hold and the price can move down.
In times like this, you can wait for the price to move to the buyers zone 2.