(Bloomberg) – Now it’s easy to forget, but there was a time early in the pandemic when the price of gold was in freefall.
It was a curious thing, as the virus caused a collapse in the global economy, and over time it would prove to be one of the great counterfeits in the recent history of financial markets. The 2020 pandemic would soon show itself as the driving force behind one of the fiercest protests the gold market has ever seen. At the close of business in New York on Friday, the bullion had spiraled up to $ 1,902.02 an ounce, 30% higher than the March low and only 1% off a record in 2011.
The virus has unleashed a torrent of forces that are conspiring to fuel the relentless demand for perceived security from the turmoil that gold provides. There is a fear of more government-ordered blockades; and the decision of the politicians to promote unprecedented stimulus packages; and the decision of central bankers to print money faster than ever to finance that spending; and the fall in inflation-adjusted bond yields in negative territory in the United States; and the sudden fall of the dollar against the euro and the yen; and growing tensions between the United States and China.
All of these things, when taken together, have even raised concerns in some financial circles that stagflation, a rare combination of slow growth and rising inflation eroding the value of fixed-income investments, could take hold in parts of the developed world. .
In the United States, where the virus is still in full swing and the economic recovery is stagnating, this debate is getting stronger. Investor expectations for annual inflation over the next decade, as measured by a bond market metric known as tipping points, have risen in the past four months after falling in March. On Friday, they reached 1.5%. And while that remains below pre-pandemic levels and below the Federal Reserve’s 2% target, it is almost one percentage point higher than the 0.59% return on 10-year Treasury bills. .
The main driver of the latest gold recovery “has been real rates that continue to plummet and show no signs of easing anytime soon,” Edward Moya, senior market analyst at Oanda Corp, said by phone. Gold also attracts to investors “concerned that stagflation will win and will likely justify further Federal Reserve accommodations.”
US bond markets have been a driving force behind the gold rush, which is serving as an attractive hedge as Treasury bond yields that eliminate the effects of inflation drop below zero. Investors seek safe havens that don’t lose value.
The gold mania right now has hit Main Street. Retail investors have helped jump-start gold-backed ETF holdings for an 18th straight weekly gain, the longest streak since 2006. Meanwhile, gold posted its seventh weekly gain on Friday, and analysts do not expect the increases end soon.
“When interest rates are zero or nearly zero, then gold is an attractive medium because you don’t have to worry about not getting interest on your gold,” said Mark Mobius, co-founder of Mobius Capital Partners, in a Bloomberg TV interview. shopping now and I would continue shopping. “
Analysts have been predicting huge gains for gold for several months. In April, Bank of America Corp. raised its 18-month gold price target to $ 3,000 an ounce.
“The global pandemic is providing a sustained boost to gold,” Francisco Blanch, head of product and derivatives research at BofA, said on Friday, citing impacts including falling real rates, rising inequality and declining productivity. Furthermore, as China’s GDP rapidly converges to US levels helped by the widening gap in the Covid-19 cases, a tectonic geopolitical shift could unfold, further supporting the case for our $ goal. 3,000 in the next 18 months. “
Gold Rally could extend until 2021 on solid foundations: BI Focus
The Bank of America’s bold prediction came after gold prices initially fell in March, when investors sought cash to cover losses on higher-risk assets. Prices recovered quickly after a surprise cut in the Federal Reserve benchmark rate and signs that the economic cost of the coronavirus would lead to massive stimulus efforts by global governments and central banks.
This is not the first time that gold has been helped by stimulus programs from the central bank. From December 2008 through June 2011, the Federal Reserve purchased $ 2.3 trillion of debt and kept borrowing costs close to zero percent in an attempt to shore up growth, helping to send bullion to a record $ 1,921.17 in September. 2011.
The crisis a decade ago had to do with banks, said Afshin Nabavi, chief operating officer of the Swiss refinery and concessionaire MKS PAMP Group, who now sees gold “pointing to $ 2,000.”
“This time, to be honest, I don’t see the end of the tunnel,” he said, at least until the US election in November.
For more items like this, visit us at bloomberg.com
Subscribe now to stay ahead with the most trusted source of business news.
© 2020 Bloomberg LP
