Physical Gold delivery on the rise – 2,000 USD only a stop-over?

Avgust 05, 2020 12:00

Source: Economic Events August 5, 2020 - Admiral Markets' Forex Calendar

After pushing to new all-time highs and focusing on 2,000 USD last week, Gold bulls pushed took the precious metal finally above the 2,000 USD mark.

Technically speaking, the mode still looks quite extended on the upside with the RSI(14) finding itself in heavily overbought territory, while the bullish sequence stays intact above 1,660 USD. Considering all this alone leaves the precious metal vulnerable to a corrective move.

But several developments in the recent past makes a consolidation, probably even a continuation of the parabolic move higher possible: as 10-year US yields drifting lower and close at all-time lows, a disappointing economic projection for the ISM Non-Manufacturing or ADP employment situation today could accelerate this move lower and thus push Gold higher.

In addition to this, the latest data from the COMEX last week on Thursday shows that 3.3 million ounces of physical Gold were requested for delivery, the largest amount ever.

The main reason seems to be that Gold futures at in New York at the Comex trade above the spot Gold price in London since March 2020 with arising arbitrage opportunities: simply speaking, if the spread between spot and futures is $30 per ounce, the arbitrager's profit is $30 minus costs for transport from London to New York, including insurance, storage, etc.

While this makes sense, we shouldn't rule out that traders in New York also currently prefer physical Gold over paper Gold, which wouldn't come as a big surprise given the massive monetary and fiscal stimulus, mid- to long-term potentialities weighing on the USD outlook.

Our point is: if the demand for physical Gold continues to grow, there will be a "delivery shortage" and similar developments as in oil with the WTI May contract back then trading in negative territory, only on the upside with Gold massively squeezing higher, could occur.

That said, Long engagements in Gold still seem attractive, even though the risk-reward ratio looks unattractive at first glance, when only looking at the technical side:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between May 8, 2019, to August 5, 2020). Accessed: August 5, 2020, at 05:45am GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.

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