On Wednesday, June 24, international spot gold surged higher before retreating, with intraday highs in the U.S. session reaching $1,779.10 per ounce—marking an eight-year record—but then plunged sharply, falling back below the $1,770 level. The underlying cause appears to be a resurgence of the dollar liquidity crunch that has repeatedly surfaced since the start of the year. All three major U.S. stock indexes declined across the board, with the Dow Jones Industrial Average dropping by more than 600 points, while rising margin-call pressures once again triggered liquidity-driven selling pressure on gold.

The International Monetary Fund (IMF) today released its latest World Economic Outlook. The report states that the COVID-19 pandemic has inflicted US$12 trillion in losses on the global economy and notes that the world is experiencing the most severe economic downturn since the Great Depression.

The IMF says it will take two years for global output to return to end-2019 levels, and warns that governments should proceed with caution in withdrawing fiscal support. In its latest forecast, the IMF projects a 4.9% contraction of the global economy this year, compared with the April projection of a 3% contraction.

The IMF notes that the global economy is currently facing both upside and downside risks. Upside risks include the supportive role of effective vaccine development in driving economic recovery, while downside risks encompass the potential delay in recovery caused by a possible second wave of the pandemic.

The pandemic led to a widespread economic contraction in both advanced economies and emerging market economies in 2020, with the gap between the two widening. Although advanced economies are expected to experience economic growth in 2021, it cannot be denied that both advanced and emerging economies will continue to face downside risks stemming from the pandemic over the following two years.

Meanwhile, mounting concerns about the outlook for the global economic recovery amid a steady rise in COVID-19 cases have weighed on market sentiment. In addition, reports indicate that the United States plans to impose tariffs on $3.1 billion worth of imports from the United Kingdom and the European Union, further escalating geopolitical tensions and prompting investors to seek safe-haven assets.

On the geopolitical risk front, Reuters reported on Tuesday, citing an Indian government source, that senior military officers from China and India held several hours of talks on Monday, during which the two countries’ military commanders agreed to withdraw troops from a stretch of their heavily disputed border.

However, some analysts note that following the 11-hour talks on June 22, India’s conclusions were largely similar to those reached at the June 6 meeting, leading both sides to once again suspend the standoff and withdraw their forces. Yet it remains uncertain how long this lull will last and whether another clash can be ruled out. Moreover, despite official statements from both China and India expressing a desire to de-escalate the situation, the Indian military has nonetheless intensified motorboat patrols in Pangong Lake.

From a technical perspective, the daily chart shows that gold has broken out of its consolidation range, opening up room for further gains. Within the day, it has now surpassed the 1765 resistance level, clearing the path toward the 1800 target. Should a short-term pullback occur, the 1765 level has already turned into initial support; a break below would risk an extended correction, testing the 1745–1750 support zone.

Based on the first-quarter inflows into gold ETFs and similar products, the outlook for defensive assets appears promising. Reportedly, gold and related ETFs saw record-breaking inflows of $15.4 billion in the quarter, with demand for gold ETFs alone surging by more than 300% year over year. Given the weak demand for gold ETFs in the fourth quarter of 2019, first-quarter 2020 inflows jumped by a staggering 1,000% compared with the previous quarter.

Furthermore, reflecting the bullish tone in gold’s previous trading session, the world’s largest gold ETF, SPDR Gold Trust, increased its gold holdings by 0.28% to 1,169.25 tonnes on Tuesday, reaching the highest level since April 2013.

Market Outlook:

DailyFX notes in an article that gold has extended its bull market, reaching a new high not seen since October 2012. With globally ultra-loose monetary policies and increasingly strained international relations, the fundamentals underpinning gold’s bull run remain solid, suggesting that prices are likely to continue climbing to fresh record highs.

In the short term, a cooling of risk appetite will further bolster gold; as long as U.S. equities and other risk assets do not experience a March-like collapse that triggers liquidity strains, safe-haven demand will provide fresh upward momentum for gold.

ANZ analyst Daniel Hynes noted that concerns about the peak of the second wave of the global pandemic—particularly in the United States and Latin America—continue to prompt investors to question the sustainability of the economic recovery, thereby supporting gold’s rally.