Marius Paun | London, UK | Senior dealer | Wednesday, 22nd July 2020
Recently gold prices broke above $1800 for the first time since 2011 showing signs that its bull run is gaining momentum (trading around $1858 mark at the time of writing). At the same time, government bonds yields remained at very low levels with a chunky part of them in negative territory. That would imply that risk-off sentiment is very much present despite the impressive recovery we saw in equities since March this year lows. Both gold and bonds are considered safe investments which stand to benefit in a world where interest rates stay lower for a long time.
Gold has been described as a hedge against inflation or perhaps better said, as a hedge against the fear of inflation. However we could be facing a deflationary environment (prices falling) as we had post Covid-19, and yet the precious metal recovered very fast. That is because it is the real interest rates (nominal interest rates minus inflation) that’s important. If rates drop faster than inflation i.e. real interest rates are falling, gold prices can still benefit – that does seem to be the case now?
As many have already noticed gold investments have already become a hot topic right now in the financial media. The reason for it? Take your pick: central banks are printing money like there’s no tomorrow, governments are borrowing all that printed cash at the same mind-boggling speed, there’s now widespread social unrest, debt- already at record highs before coronavirus- is going even higher, ongoing US-China trade tensions, fears of economic depression. To say we’re experiencing extraordinary times would be an understatement.
It’s true that the Covid-19 outbreak had initially pushed gold prices down together with almost everything else. The US dollar was at the time the clear winner. But the precious metal is now more than 20% higher since March lows and interestingly, has reached all-time highs when priced in pound sterling, euros and Australian dollars.
When the authorities are attempting to justify the massive monetary stimulus already allocated or underway what we hear is that the current year was an unprecedented one. While coronavirus was indeed new, the response to it by central bankers and governments is definitely nothing new. If anything, it’s becoming predictable, a pattern easy to guess once crisis strikes: unforeseen bad event happens, leaders start printing money out of thin air and slash interest rates, debt rising, all of the above push gold higher. The original Greenspan put has become the Bernanke put, the Yellen put and now Powell’s put.
The Financial Times already said ‘some of the world’s largest hedge funds are raising bets on gold given that the unprecedented response by central bankers will lead to devaluations of major currencies’.
Reuters estimates that in less than 6 months authorities have already pledged around $15 trillion stimuli to tackle coronavirus effects. That’s the most extreme monetary intervention in human history by a long shot. The bad news is that the world was already in huge debt. The global debt was over $250 trillion last year which is estimated to be up by 40% since the 2008 financial crisis. But they cannot print gold. In a world awash with cheap credit, debt and bankruptcies, gold was always the last survivor. History proves that.
The World Gold Council has released its report showing gold outperforming all other major asset classes in the first half of 2020. Expectations for a rather faster V-shaped recovery predicted a few months back are now ‘shifting towards slower U-shaped recovery or even potential setbacks from additional waves of infections’. It expects gold to remain in high demand as a strategic asset.
Gold has been in a strong uptrend lately. It consolidated around $1800 mark since the beginning of July and now seems ready for the next leg higher. One could feel it will have an almost inevitable run of another $62 to retest the old record high of $1920 touched in September 2011.
The price now sits comfortably above the 6 and 21 moving averages and both indicators pointing upwards. On the upside, the bulls have undoubtedly set their target in the record high of $1920 especially when there seems to be very little resistance in the way. On the way down, the first target is $1786, last month’s high, which was good resistance in late 2011 and early 2012 now turned support. Below that there is also plenty of good support just below $1700 handle where we can also see the short-term moving averages. Nevertheless, that’s a big task for bears to re-test those levels.