Gold Set to rally on Diversification Demand

The gold price has reached its highest level in almost eight years due to financial market concerns about the corona crisis. The price of the precious metal is on the rise this year as investors are looking for safe havens to invest in because of viruses.

Gold rose to the highest in more than seven years after the Federal Reserve said stocks and asset prices could suffer a significant hit from the coronavirus pandemic, and warned the process of economic recovery may stretch through until the end of next year.

On one side , national Economic council Director Larry Kudlow said on Friday that U.S and China were working on implementing the deal and on the other hand , U.S President Donald Trump declared that he was “not thrilled” with the phase one U.S.-China trade deal reached in January

And if that was not enough, the Trump administration blocked chip supplies to Huawei Technologies, with investors on edge fir a reported possible Chinese retaliation.

The price of a troy ounce of gold (31.1 grams) is now around $ 1760, the highest level since October 2012. The price continued to rise following warnings from President Jerome Powell of the US Federal Reserve about the economic damage caused by the corona virus can cause.

Gold and silver broke higher this week as we started to see the dreadful damage done to the global economy from many weeks of inactivity. Precious metals look set to rally further on safe-haven and diversification demand.

Monday’s gain in gold came in after data released Friday underscored how hard virus-related shutdowns have hit the world’s largest economy. U.S. retail sales and factory output registered the steepest declines on record in April.

The coming months are likely to see a wave of bankruptcies, major negative corporate earnings revisions and with that, the risk that unemployment will remain stubbornly high. Self-imposed social distancing will keep the whole experience industry from travelling and exhibitions, to restaurants and cinemas under pressure for months to come.

Furthermore, Commercial real estate could be among the hardest-hit industries should the health crisis deepen, the U.S. central bank said in its twice-yearly financial stability report Friday. Separately, Chairman Jerome Powell said in an interview with CBS that a full recovery of the U.S. economy could drag through 2021 and depends on the delivery of a vaccine.

Meanwhile, U.S. Federal Reserve Chair Jerome Powell warned in a “60 Minutes” interview that the U.S. economy could shrink up to 30% in the second quarter. Although the U.S. could avoid a second Great Depression in the long run, a full recovery would depend of the development of a vaccine.

Powell also added that the Fed was willing to deploy more ammunition to aid in economic recovery if needed.

Bullion has surged 16% this year as the spread of the virus curbed economic growth, roiled markets, and prompted vast amounts of stimulus to be unleashed by governments and central banks.

For the firm believers of bullish sentiment for gold, here are some key points that will strengthen their belief further-

  1. Firstly, we have central banks cutting interest rates and heading to zero or lower. The Swiss National Bank, the European Central Bank and the Bank of Japan all currently have negative interest rates. For many countries, where inflation levels are higher than interest rates levels money in the bank will simply lose value year on year. Therefore, investors who have moved into cash will be looking to place their cash in a safe haven.
  2. Following more than a month of range bound trading,gold finally managed to break the shackles that had kept it tied to $1700/oz. Renewed stock market weakness, a warning about the outlook from the U.S. Federal Reserve and a continued surge in the number of people joining the jobless queue are just some of the recent drivers.  In the last three recessions gold has increased in value, so as a hedge for a recession gold does have strong appeal.
  3. Furthermore with large scale quantitative easing (QE) programmes undertaken by central banks around the world and some analysts anxious about high stock valuations, gold offers a hedge against such devaluing risk. QE devalues a currency, so money is literally losing value. This is why many analysts would recommend have a portion of your portfolio in gold. History may not be repeated, but the fundamental outlook for gold is currently very strong.
  4. Souring U.S.-China relationship, as well as other bleak news, will lead investors to turn to the safe-haven yellow metal.

The Covid-19 pandemic remains very difficult to beat and it carries the risk of re-emerging in places where it had been knocked back. While still not under control in many countries, the U.S. and others risk a prolonged impact with some states or regions attempting to reopen before having the virus under control. The recovery is probably set to be more problematic than the optimists think, with gold set to benefit from the enormous boost to money supply that is going to follow.

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