Gold bounced sharply from its mid-March lows as central banks slashed interest rates and launched quantitative easing, while governments undertook massive stimulus measures, in an effort to combat an economic slowdown prompted by the COVID-19 pandemic. However, gold has been largely range-bound for nearly two months now.
Investors continue to remain bullish for gold mainly due to the following reasons-
- FED- QE is “huge positive” for gold since it means a low “opportunity cost” of holding the metal. This refers to any interest income lost by holding a non-yielding asset such as precious metals instead of bonds. The Federal Reserve (Fed) will face numerous challenges in the months and years ahead. Economic output will remain below potential for years to come as we deal with the pandemic and its long-term scarring effects. An additional challenge will be a U.S. federal government budget deficit that will exceed $3 trillion this year with significant likelihood that it could be larger.
- Unemployment numbers and S&P weak earning and its effect on interest rates – Unemployment is expected to remain high and S&P companies to continue posting weaker earnings. This would lead to lower (or increasingly negative) real interest rates, which is positive for gold. Absent further action by the Fed, the deluge of Treasury securities will likely start pushing interest rates higher, threatening the overall economic expansion. The Fed cannot allow this to happen. As I gaze into my crystal ball, the Fed’s roadmap is likely to include the following progression of policy tools as the economy remains mired in a protracted downturn
- US Economy– – With the Fed going all-in on financing the government deficit, the U.S. dollar could be at risk to negative speculation of its status as the dominant global reserve currency. Investing in gold may help offset this trend.
- Fiscal and monetary stimulus programs across U.S., Europe, China and other countries- this action is but obvious given the damage that COVID-19 has caused globally. As we move towards the path of recovery, which will definitely be slow, gold is expected to benefit from this.
- Equities- For one thing, the relief rally in equities is likely to eventually run out of steam. The economy still faces challenges, one of which is the potential for a second wave of COVID-19 infection which will further strengthen gold prices.
Gold has always been investors favourite because of its following features-
- Historical position
- Long term store of value
- Performance during times of crisis
- Effective portfolio diversifier
- High liquidity asset
Due to this, gold has gained more prominence every time the global markets face uncertainty. And we think this sentiment will carry through in late 2020-2021.
Gold prices should comfortably break through $1,800 an ounce, whenever the sharp rally in equities stalls, when gold ran up to its record high above $1,920 an ounce back in 2011, the market was in “bubble-like conditions” that did not last long before the buying dried up. But in the current situation, many more economies around the globe have been impacted, meaning a recovery will take longer, in turn meaning gold buying should be more sustained.