Why Gold? Why is Gold rallying? Why do we keep telling you all to buy Gold?
You may be wondering what's so fascinating about gold that we keep buying it? There are a lot of reasons for that, but there are few very important factors which tell that the gold will soar to new highs. All of these factors will be responsible for the growth of gold.
1. BASEL 3
The Number #1 reason which is responsible is called BASEL 3. So, what is Basel 3? How does it help gold? Last year a new gold rule was brought up by the most powerful bank in the world, Bank of International Settlements or BIS. Earlier gold used to be viewed by the banks as a risky asset, considered “Tier-3”, whereby only 50% of the market value could be counted for reserve purposes.
But now the tables have turned by this new rule BASEL 3. Under Basel-III, Gold is no longer considered a “Tier-3” asset but is bumped up to a “Tier-1” asset, and valued at 100% of market value. This makes Gold a “riskless” asset, in the eyes of world banking authorities. This means that the bank values gold at 100% of its market value. It is a major change in the way central banks value gold.
According to this rule, banks can now consider physical gold they hold, in certain circumstances, as a 0%-risk asset. In simple terms, gold has become safer than it used to be. Previously, gold was considered riskier and most of the time could not be classified in this way. But Basel III rules are making gold more attractive. And this is huge.
This is one of the reasons why the central banks of almost all countries are stacking gold. According to the reports of Bloomberg and financial time central banks make a record $15.7bn gold purchases and Poland Repatriates 100 Tons of Gold From Bank of England Storage and central banks from all around the world are buying as much gold as they can.
The last time we saw anything like this was in 1970, during the time of President Franklin D. Roosevelt. In 1933 the president gave an order that all people have to deliver back the gold coins or gold bullions to the government and gold holdings was banned in the USA.
The US government took the effort and took back almost all the gold holdings from the people of the USA. Until 1970 President Richard Nixon announced that the ban over gold will be soon lifted and citizens will be allowed to own gold. On January 1, 1975, these restrictions were lifted and gold can now be freely held in the U.S. without any licensing or restrictions of any kind. And then Gold took off, soaring from $38 an ounce, to $183, then to $594, all the way to $839.
And now this is happening again.
If you look at the data given below, you can see how the price of gold took off after the ban was finally lifted in 1970-1975. This new rule is not totally similar to what happened in 1970, but it is important for gold like the lifting of the ban was important back then. From the time this rule was brought up, all of the world's central banks are buying gold. And this rule is going to increase the demand for gold even more and push its price to the new highs.
Now, this was one reason, the next one is something which you are very aware of and worried about.
2. Corona virus
Coronavirus disease also is known as covid-19, was first reported in Wuhan, China on 31st December 2019. What is the coronavirus? Coronaviruses (CoV) are a large family of viruses that cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV).
The coronavirus was first considered as more of an epidemic as its cases were only found in china but just within 2 months, it is developing into a pandemic as most of the countries in the world seem to be affected by it. According to Bloomberg, the WHO declared corona as a pandemic. Since this became a major issue in most of the countries, it started affecting the global market. Its effect was such that china's main stock market index fell 9% in a single week.
We are not talking about a stock, but the whole stock market and this is huge. Not only Chinese, but most of the world's major stock market is crashing due to the fear of coronavirus. This is causing the rise in demand for safe havens (or Safe Assets ) as investors are not trusting the mainstream fiat currencies or the other stocks and hence looking for safer assets to invest in.
This is when the gold comes into rescue. This increase in demand for safe-haven assets is causing the investors to move towards gold and causing the rise in the demand for gold. Now, in the coming days, as we see the increase in the spread of coronavirus we will see more investors shift towards gold and hence will cause the price of gold to soar higher.
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. Recession usually leads to the demand for safe havens and hence is beneficial for the price of gold, as gold being a safe haven asset. What is recession? 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, Pandemic 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 or a pandemic like a coronavirus.
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.
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 Rally.
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. Recently the FED announced an emergency rate cut and lowered the interest rate by 50 bps.
If you look at the current market conditions and how the stock market is crashing it will be clear to you that the recession is close than you think or maybe we are already into one. It is creating a panic among the investors and billions of dollars have been lost in a single day of the market crash.
Whenever the situations get worse, it will make the safe havens like gold attractive, and the investors will again shift towards gold for shelter. Everything which happened in 2008 seems to be happening again and this time the recession is gonna be huge.
Let us see what the world's top billionaire investors are saying about gold. The founder of the world's largest and most successful hedge funds Ray Dalio says, Cash is trash, hold some gold.
Another billionaire speculator Doug Casey previously said" I believe the gold price is poised to move from its current level of around $1,550 per ounce to $2,000… $3,000, and beyond."
He believes the gold will keep on rallying in 2020
Many other investors are making the same comments and supporting gold And there are many other reasons for it. In our previous blogpost, we explained in detail about other major reason why gold is going to surge higher.
How to trade gold?
We are no fortune tellers and we can't predict the exact future of what's going to happen. Everything that we are discussing about is all based on the information we gathered and the analysis we did. Keep in mind, trading is different than investing and it is a lot harder when you trade a volatile pair like gold that too in these volatile conditions when a lot is going on in the market. So, the best way to trade gold is,
1. Risk as minimum as you can.
2. Use a lot size lower than you usually do.
3. Buy the dips.
What we mean by buying dips is to target those areas where you see that sellers are getting out and buyers are getting in. To give you a better understanding of that here is our analysis of gold. Let us begin with our previous analysis to give you a better idea. In our previous analysis, we mentioned two zones for buying, As you can see in the chart.
The only reason we told you to do that is that those were the areas where a lot of buyers were active and the price seemed cheap to new buyers and the buyer entered and it worked. There was no rocket science behind it, it was a simple method of support and resistance.
Now in the same way we need to look for areas where buyers are active and hence we could enter there.
According to this chart, you can see we have marked the areas where we think you can probably get an entry. So, enter a buy trade and put the stop-loss few pips below the zone and make sure to use a proper risk management plan and use a smaller lot size than you usually do.
When it comes to trading, no one can be 100% sure and it is just a probability. So, if the price does not retrace to the level and moves up instead, you can use the simple support and resistance principles and upgrade your trading plan accordingly.
Support and resistance work the best during times like this and especially on gold.