Marius Paun | London, UK | Senior dealer | Friday 17th, April 2020
Very few people doubt the COVID-19 pandemic will have a severe lasting impact on the global economy. To mitigate that, central banks and governments around the world have embarked on massive stimulus packages comprising of near-zero interest rates and quantitative easing on a scale never seen before. Along with helping businesses which are currently struggling, or on the verge of going bankrupt, these measures have been applied for financial markets as well. They are designed to try to maintain liquidity and to stop the metamorphosis from a pandemic crisis to a financial crisis.
The numbers are absolutely staggering. During the past few weeks, the US Congress has adopted a historic $2 trillion to combat the US economic slowdown. On top of that, last Thursday the US Federal Reserve unveiled a $2.3 trillion injection, this time aimed at small businesses and municipal finances. In the UK, Bank of England cut the benchmark interest rate close to zero and the UK Chancellor Rishi Sunak promised a £350 billion aid package of loans and grants. By and large many countries around the world are implementing stimuli in the region of 15% – 20% of GDP.
In any time of uncertainty, let alone the global turmoil we are currently experiencing, gold has historically been the preferred safe asset. Yes, it dropped during the initial panic when investors sold almost everything, and consequently reached a low of $1451.16 on 8th March this year. But since that point, it made a comeback with a vengeance. The precious metal reached a 7-year high of $1746.7 during intraday trading on Tuesday, last seen on October 5th, 2012.
Perhaps we could look at the recent history, specifically the financial crisis of 2008 and see if we can find some similarities. After all, the phrase ‘quantitative easing’ was coined during these times and spurred a rally in gold which eventually pushed its price to an all-time high of $1917 on September 5th, 2011. But before we getting to the possibility of gold retesting its all-time high, let us note that precious metal behaviour during the initial panic selloff in March this year mimicked the financial crisis in 2008. Back then, capital requirements initially hurt gold.
The post-credit crisis, between 2008 and 2016 the US Fed expanded its balance sheet by $3.6 trillion. This time around, only last month, it announced over $2 trillion stimuli. Here in the UK, Bank of England adopted QE equivalent to £375 billion, to buy assets and that figure rose to £435 billion after Britain voted to leave the European Union. It also cut borrowing costs to the lowest level in over 300 years. Now, due to coronavirus, Bank of England has pushed the mark even further, its target has gone higher from £435 to around £650 billion.
And if you need any more proof this time is QE on steroids look no further than the government’s overdraft facility. Recently, that overdraft was extended by the Bank of England from a ‘limit of just under £400 million to an effectively unlimited amount’ Financial Times reported. The purpose is to cut off the middleman, money printing, and hand it directly to the government instead of issuing gilts bought by investors followed by the central bank buying them back. Furthermore, the UK Government plans to raise debt in the markets this month from £15 billion to £45 billion according to FT.
To understand the extent of this downturn, global stock markets have lost about $30 trillion so far. Earlier this week, Goldman Sachs predicted the advanced economies will shrink around 35% this quarter from the previous 3 months, four times as much as the 2008 financial crisis. The World Gold Council has released some interesting statistics for the first quarter of 2020:
- Global gold-backed exchange-traded funds added 298 tonnes, or net asset growth of $23 billion – the highest quarterly amount ever in US dollar terms and the largest tonnage additions since 2016.
- During the past year, gold exchange-traded funds added 659 tonnes, the highest figure since the financial crisis, with assets under management growing 57% during the same period.
The same WGC reports that ‘in the three years following the 2008 crisis, gold increased over 300% from peak to trough and gold ETFs grew their holdings by over 100%. Reassuringly gold rose in all currencies, not just vs the US dollar. That helped convince investors that they should not mistake US dollar bear markets for gold bull markets.
So, we have a mixture of dropping stock markets, struggling economies, and rising debts to levels never seen before all on a global scale. Analysts are now saying it is hard to think of a time when gold had it better for its medium to long term future. Nonetheless on the short term is considerably harder to gauge the potential direction. We are now in a bear market rally as stocks have recovered over 20% from the late March bottom. Is a retest of those lows in the cards? Because that could again drag gold prices back down. Or will gold’s safe haven’s status come into its own and once more the 2008 incredible rally will be repeated?
The short, medium and long term trends are all pointing upwards
The price sits comfortably above the 6 and 21 moving averages and both indicators points higher. The short-term MA is well above the longer-term MA. After making a double top formation in July 2016 and early 2018 gold has once more moved up. Since early 2015 the chart indicates a string of higher highs and higher lows. Additionally, since 2018 the trend has clearly steepened.
On the downside, the first target is resistance turned support around $1690 mark. If sellers manage to push gold below that, support at $1620 – $1630 handle will come into focus. The level has acted as both good support and resistance from 2011 to 2013 so is a level closely watched. Next look for 61.8% Fibonacci retracement at $1585.
On the way up, the trend needs to be confirmed by a close above the recent high at $1746.7 reached on the Tuesday April 14th. The bulls, who are currently in control, will then look to test resistance at $1800 which held very well during 2011 – 2012. So well actually that bulls eventually gave up. We suspect that the ultimate prize will be a retest of all time high of $1917, reached in September 2011.