Finally, we are getting closer and closer to the reality of a vaccine! Pfizer claims that its potential Covid-19 vaccine was found to be more than 90% effective in preventing infections. Surprised? Not really. With more than 200 vaccines in development worldwide and half a dozen in phase 3 human clinical trials, we expected a viable vaccine by the end of the year. And we also expected a knee-jerk reaction in gold prices when that happens. In fact, gold prices corrected by 4% on Monday due to renewed risk sentiment.
Stock markets celebrated the news. But the global rally sparked by the announcement lost steam later in the day, with stocks closing only slightly higher despite earlier gains as investors rationalized and took in the news with cautious optimism.
The experts hope to see more data, noting that questions about the efficacy, regulatory approval, timing, costs and distribution of the vaccine need to be answered. Pfizer’s vaccine has yet to be submitted for FDA approval and appears difficult to implement. It requires two doses and ultra-cold storage temperatures that could drive up the cost of the vaccine and potentially limit mass distribution.
Yes, Pfizer’s announcement is positive and encouraging, but realistically, the vaccine may not reach local pharmacies for the general public any time soon.
The specifics of this news aside, we believe the impact of a vaccine on gold prices is overestimated. Remember, the prospects for gold had gotten brighter with a U-turn in monetary policies from the Federal Reserve in 2019, as the economy was rapidly losing steam, even before Covid-19 hit. The pandemic was a tailwind for gold, but fundamentally that does not drastically alter the outlook. This is why.
1)Vaccine efficiency and timing are concerns
Governments around the world are speeding up the usual approval processes to quickly deliver a Covid-19 vaccine. In fact, Russia has already launched a vaccine, but there is skepticism about its safety and efficacy, considering the accelerated schedule. To put things in perspective, the fastest a vaccine has been made is 5 years, and it’s here just a few months after the pandemic. Even if one ignores that, large-scale manufacturing and a public launch are months away – it may be mid-2021, which has always been the base case. Thus, the stock market optimism about Russia’s announcement and that of Pfizer was short-lived.
2) Expecting an immediate and total restoration of economic activity is naive
There is no doubt that the impact of a successful vaccine on the health effects of the pandemic will be positive, as full-scale implementation is achieved. But it cannot undo the extraordinary economic damage caused in recent months overnight. In fact, with a resurgence of cases in the United States and Europe, a full reversal of the Great Close has been further delayed, slowing the economic recovery. So while the announcement of a vaccine may lead to a temporary correction in gold prices and heighten risk sentiment, basic economic realities will take time to fix. Until then, normalcy and certainty will elude us and investors will prefer the stability of gold.
3) Weak economy needs government support
The economic damage has been severe and therefore the economic recovery will take longer. The World Bank estimates that a full recovery will take 5 years. It took almost 7 years to regain jobs from the last peak of unemployment in the US, this crisis has seen almost triple the loss of jobs. This helps to reconcile what the World Bank says, it will take more time and it will need some heavy lifting from the government. To support besieged economies, governments will have to resort to more stimulus measures over the next 2-3 years, more spending that will result in more deficits and increased debt. Gold should continue to benefit from this wasteful policy.
4) Low yields will continue to limit the usefulness of bonds
Investors can expect sustained accommodative policies to get the ailing economy back on its feet in the coming years. Central banks remained accommodative for six years after the 2008 global financial crisis, and this is much more serious than that. Therefore, bond yields and short-term interest rates will remain low in nominal terms and negative in real terms for the foreseeable future. The Federal Reserve has announced that it will keep rates near zero until 2023, limiting the ability of bond markets to act as a hedge against stock price volatility while minimizing the opportunity cost of have zero yield gold. This will be bullish for the yellow metal.
5) Weaker dollar and inflation on the horizon
Even with a Republican-led Senate, Biden will get a stimulus bill, albeit a smaller one, passed early next year. Unlike the global financial crisis, in which new money creation went to banks and financial institutions, this time massive monetary policy and never-before-seen government aid packages seem to be trickling rapidly into the real economy. Currency inflation is resulting in a weaker dollar. A weaker dollar and high liquidity could also result in higher commodity prices, and therefore could be inflationary. The Federal Reserve has announced that it will adopt an average inflation target in the future that will allow inflation to exceed 2%, to support the economy hit by the pandemic. Gold, known for preserving purchasing power, will become a preferred asset at such times.
This means that Monday’s reaction in gold prices is only temporary and the outlook for gold remains positive. So buy the dips and rack up gold, and benefit from the long-term prospects for gold, which acts as a counterweight to fiat money that is losing more and more credibility.
(The author is Senior Fund Manager-Alternative Investments Quantum Mutual Fund. The opinions expressed are his).
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