INSIGHTS

Duncan Donald

Mon, Jul 27


Gold surges towards $2000 as haven remains popular

The headlines in the financial markets today are centered on the march of Gold, which after a spell of sitting on the sidelines after the cross-asset class fall that was seen in March is breaking and making historic highs. But, even in the extreme eye of the Covid storm the gains seen in the early part of the year were not too painfully eroded. At that time, many were left scratching their head as to how the investment community could want to sell the most obvious safe-haven product when the markets were enduring such an extreme downturn? The answer, whilst not abundantly obvious was at least logical. As the stock markets plunged margin calls were plentiful as portfolios were unwound at a significant rate. The result being that the good (positions) had to be sold to fund the bad, and that’s exactly where gold found itself.

 

But now as the stock markets have endured, stabilized and progressed back to post pandemic levels, there could potentially be an argument at face value for downside. However, with Gold nothing is always as it seems. The inflated US Stock market is underpinned by Facebook, Amazon, Tesla, Google, Apple et al. The resurgence of the US indices can be almost wholly attributed to these stocks, so is the wider economy really any healthier than it was. President Trump’s election campaign as resurging cases across several key US states has his populism at a low, with his campaign based on shrugging off the virus concerns so stocks can again soar, meaning he can tell middle America they are wealthier thanks to him, is starting to lose traction with key states for him being some of the worst affected by the virus second wave across the country.

 

With an economy being driven higher by the few companies not the many, it looks like there will be no alternative but to keep rates lower for longer, with the door starting to open towards negative rates in the US like we have seen in Europe and Japan.  So with the potential risks of US/China tensions rising over Huawei and Hong Kong, virus second wave, political uncertainty and interest rates pinned to the floor, safe haven buying points to Gold yet again, and unlike back in March the fact that Gold doesn’t offer a yield (interest amount payable for holding) appears far less of a concern with interest rates suppressed at current levels.  

 

We also must consider the inflationary issue that comes with enormous stimulus plans like we have seen from Governments and Central Banks to date. Whilst its not likely to be this year, we are certainly headed towards an inflation problem and historically Gold outperforms throughout periods of inflationary pressure.

 

We are looking for an initial break of 2000 and perhaps onwards towards 2500.  Whilst that may seem a big ask after the moves already seen, it's not beyond the realms of possibility given the proven facts above.


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