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Time For Gold Rush Again

When gold prices had soared to $1920.69 per troy ounce in September 2011, market analysts believed that unless something dramatic occurs, the bullion will never see such levels again in the foreseeable future. Fast forward to 2020 and we are in unprecedented times with the coronavirus causing havoc and the uncertainty of how things will move forward.

With the virus taking a heavy toll on our physical existence, the bullion has woken up and jumped coherently.The value of the yellow metal had attained $1764.97 per troy ounce on May 18, the highest witnessed since October 2012. Some analysts have also jumped the gun in stating that the prices will eventually pass the all-time high. Although stock markets around the globe have taken a beating in recent months, gold has roared back and currently trades at $1737 per troy ounce at the time of this article.

Comparison to stock index

Gold is often regarded as an alternative instrument to park money against turmoil and when ambiguity envelops the global economy. The strong bullish ride witnessed since the start of 2020 is in stark contrast to the performance of the stock markets. Having commenced the year at $1611.31 per troy ounce, the value has inclined with each successive month and is now up by 10%. On the contrary, US-based stock indexes including Dow Jones had dropped 36.77% at the height of the pandemic. Although the numbers are improving, the index is still down by 10.93% since the beginning of the year.

Central Banks response

In response to the pandemic, numerous central banks around the world have enacted monetary policies that have also attributed to the rise of gold. In the USA, the Federal Reserve has cut the federal funds rates to zero and have hinted that the rates will remain at zero for some time to come. The presiding Chairman of the Federal Reserve, Jerome Powell, has also strongly suggested that further monetary stimulus could be on the way given the state of affairs which will negatively impact the greenback and provide bullish momentum for gold.

Need for safer investment

Predictions are rife as to when the pandemic or the effects on the economy will slow down. Market pundits believe that the persistent global uncertainty coupled with the forecast that corporate earnings will undoubtedly slump for the year will provide ample reasons for gold to benefit. As per popular estimate, gold now is more attractive than other asset class. Due to the pandemic, the US 10-year bond is now standing at just 0.7%. With the rise in demand for gold, most traders have poured cash into the gold-backed exchange traded funds including the SPDR gold shares.

History repeats itself

Market analysts have observed an eerie similarity to how gold behaved during the Great Recession of the late 2000s. In retrospect, gold slumped in the aftermath of the Lehman Brothers bankruptcy and as fears about the Global Financial Crisis developed. However as panic selling waned, gold then took off on an epic rally and finally culminated in attaining an all-time high price in September 2011.

Market pundits have drawn parallels to the unfortunate events of 2008. Gold observed a panic selling syndrome in the early half of the recession to raise cash but thereafter due to stimulus packages and the fragile economy status, it served a perfect recipe for its bullish ride. In hindsight, gold could benefit from more dovish estimates including a fresh wave of bankruptcies as a result of the pandemic. It could be déjà vu once again as the Fed and Congress could announce economic aid packages lifting gold prices higher. The global corporate sector paints a sorry outlook around the globe and the real picture could be reflected in ensuing days.

On the other side

While the outlook for gold looks hawkish and positive, there are some potential risks for gold for the remainder of 2020. The value could suffer if the stock market reverses its fortunes and rebounds on the anticipation of the global economy and corporate performance bouncing back earlier than forecasted.
The bullion is also used as an industrial metal and is a component in luxury items like necklaces and rings. So the demand side is historically affected by other means apart from the investment bracket. As per the World Gold Council, the demand for gold jewelry declined nearly 40% in the first quarter as compared to the numbers a year ago along with a decrease of 8% in demand from technology companies.

Historically, the value of gold has picked up momentum during times of weakness in the US Dollar. In current times, the US Dollar index is up about 4% this calendar year. Experts predict that the dollar will eventually weaken as the Fed persists with printing money and the Trump government and the Congress could spend more on bailout programs.

Conclusion

If COVID-19 continues to unsettle the global economy, the prices could rise further and test the all-time high soon. However, monitoring other asset classes is also paramount to forecast the upcoming trend where gold could be headed.

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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