Has the big short on gold finally arrived?

I have a received a lot of questions on the price of gold or more specifically the XAU/USD in the past couple of days. For much of 2020 its been the go-to haven asset class, the gold standard (pun intended), and its performance has not let many people down until recently. Naturally, a lot of interest has been generated around where its direction could be next. A number of tier one firms and analysts such as Goldman Sachs, Citi Group, and Westpac have all provided their forecasts, unfortunately for many an investor the results and the jury is mixed. Westpac feel as prices have peaked and its starting a new downward trajectory, Citi are looking to be on the bullish side all but more conservatively with slower growth.

So which direction is it really going to go in and who is right? Well the answer is somewhat complicated, but they are both right for the time being. Gold is interesting asset, its more than 5000 years old, you can pound an ounce of the stuff into an 80-kilometer wire (not recommended) and in times of recession or crisis investors flock towards the stuff like a moth to a flame. We tend to find as analysts that gold values fluctuate inversely to the economic environment. When a bearish economic cycle is present, it’s a booming one for gold and vice versa.

The issue with forecasts now is that there are mixed signals in the current economic climate and both sides have an argument that suggest logical thinking. The bearish view point that entities like Westpac are offering are focusing on the introduction of vaccines; and they are banking on the idea of the pandemic being left in the rearview mirror and investors rotating into riskier asset classes like stocks. The buy side argument looks at stimulus and quantitative easing from central banks a little bit closer, suggesting that we will see plenty more cash dumps and bond purchases over the next few years.

Personally, I feel more in touch with the short side argument, but I have some caveats or milestones that I want to see.

Firstly, I want to see technical analytics matching up with the fundamentals. Check.

XAU/USD, daily – Down going trend channel in orange.

I then want to see, what the Federal Reserve and Congress decide to do with the next run of policy adjustments and if stimulus can be delivered in the fourth quarter. And I’m still hung up on the fence here, the November FOMC minutes suggest members have some opposing views, but it certainly looks like some changes for the asset purchase program will be updated before the year end. So, this one is under my watchful eye.

Third and likely the furthest mile marker out is the distribution of the vaccine.

If I see the stars align then, you can extrapolate what I’m likely to do.