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GOLD: Celebrating New Highs

Life has indeed come full circle. I had started my career in the commodity markets in early 2011. The global economy was recuperating from the recession of 2008-2010 with the Federal Reserve announcing quantitative easing measures to revive the bleeding economy. As a result, gold had gathered momentum since the beginning of the crisis and galloped on to attain the all-time high price of $1920.69 per troy ounce in September 2011. We had never witnessed such a whirlwind ride before and the fleeting thought was we never will experience such highs again. How wrong were we?

The bullion price celebrated new highs this year on July 26 with prices jumping to a mindboggling $1981 per troy ounce. However, this surge in the value of gold will not come as a surprise for market analysts who have been following the current financial developments. The bullion has appeared as a safe haven during tumultuous times as the COVID 19 pandemic glaringly affects the global economy. Boosted by a drop in the Federal Funds Rates, colossal government stimulus measures and the burning US-China relations, the yellow metal has taken up the mantle of an attractive hedge as nations around the globe identify measures to manage their deteriorating economies.

Interest Rates Near Zero

In a recent statement after a two-day meeting, the Federal Reserve reiterated that it expects to keep its interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The statement appears at a time when pandemic cases surge across the landscape of the US economy and many states have stalled or rolled back their original plans of reopening their respective states. Although the Fed noted that the economy had “picked up somewhat”, the central bank repeated its pledge to use the full range of tools to support the economy in these challenging times.

Injecting Stimulus Measures

The Federal Reserve has injected an unparalleled amount of new money into the economy since early 2020 in an effort to avoid a collapse from the impact of the pandemic and the likely restrictions of the business activities thereafter. The stimulus measures of over $6 trillion have been introduced into the economy with the numbers accounting for roughly the double of the entire amount injected during the preceding financial crisis of 2008-2010. And all evidence points to the fact that the Fed is just getting started.

US-China Rift

What started as a political agenda has swiftly become a driving force for the resurgence of gold in recent years. The uncertainty of the relations between two major economies and the resulting rift has ushered a jump in the gold prices. Over the two years since the trade war started, the two economies have been embroiled in countless negotiations-introducing foreign technology restrictions, fighting over several WTO-related cases-invariably leading the US-China to a trade war never witnessed before. At the start of the year, the US President and the Chinese Vice Premier had agreed to limit some US tariffs on products from China on an agreement that China will purchase more farm, energy and other goods from the US. However, the rapid developments surrounding the coronavirus made this deal unstable and the rift widened. The sole winner in this otherwise unpleasant narrative was gold.

What the Future Holds?

With numerous financial and other uncertainties playing a major role, several risks will play out over the remainder of the year and into 2021 that could drive gold higher. JP Morgan Chase & Co. has stated that the rally, that has already seen prices soar by 30.64% in 2020, could start to lose steam later this year. However, Goldman Sachs Group Inc., Citigroup Inc. and Bank of America Corp are riding with the high wave, with the latter forecasting the metal to climb towards $3000 per troy ounce mark.

One of the many things that we have learned in 2020 is the age-old cliché-expect the unexpected. The consensus is that gold will build on this momentum and move higher. As for me, the prices will remain in a new range for some while before some driving force like the interest rates, stimulus measures or geopolitical risk moves it higher. But then, that’s me!

Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&d@mexnepal.com

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