A new gold rush. Yellow metal close to eight years maximum

A new gold rush. Yellow metal close to eight years maximum

“If all remains in the status quo, there are significant favorable winds for gold,” said Michael Ponikiewicz, a portfolio manager of Acadian Asset Management.

Gold is seen as a safer and more stable place to park money in times of turbulence, and its strong performance this year is in stark contrast to the broader stock market: gold prices have now risen by almost 15% in 2020, while the Dow is down 15% and the S&P 500 has fallen by almost 10%. (Technology infused Nasdaq increased by over 2%, however.)

Monetary policies implemented in response to the pandemic have also pushed gold upwards.

The Federal Reserve has reduced interest rates to zero, probably for the foreseeable future. Fed President Jerome Powell also strongly suggested that further monetary stimulus may be coming, which could weaken the dollar and increase inflationary pressures – and that would be bullish for gold. (Bitcoin bulls are having a similar discussion.)

The desire for safer investments could push gold up

Nobody knows for sure when the coronavirus pandemic – or its effects on the economy – will vanish. Experts say continuing global uncertainty coupled with corporate earnings expected to plummet for the rest of the year will continue to drive gold.

After all, Ponikiewicz observed, gold is more attractive at this time than another important asset that is usually popular in uncertain times: long-term bonds. Those yields plummeted due to coronavirus concerns, with the US 10-year bond standing only 0.7%.
With all the demand for gold, investors poured money into gold-traded exchange-traded funds like the SPDR gold stocks (GLD).

It’s oddly similar to how gold behaved during the Great Recession, says Steven Dunn, head of ETFs at Aberdeen Standard Investments.

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Gold plunged in the immediate aftermath of the Lehman Brothers bankruptcy as fears of the global financial crisis sparked all markets. But once the panic sale subsided in 2008, gold then took off in an epic rally that culminated in its all-time high in 2011.

Dunn thinks history can repeat itself.

“There are huge parallels to 2008. Gold was first sold because it’s a liquid market and it’s a good thing to sell for money,” said Dunn. “But when you look at all the global stimuli and economic uncertainties, it’s a perfect recipe for gold.”

Dunn, whose company runs the Aberdeen Standard Gold ETF Trust (SGOL), he believes gold could be supported by more inferred data, including a wave of bankruptcies. This will likely lead to further economic aid packages from both the Fed and Congress, which are expected to further increase gold prices.

“There is still a lot of bad news coming,” said Dunn. “The prospects for gold are still strong with all these unknowns.”

Too fast?

However, there are some potential risks for gold in 2020.

Prices may be affected if the recent stock market rebound picks up momentum, in the hope that the global economy – and corporate profits – will recover faster than expected.

There is also the fact that gold is not just an investment. It is a physical asset that has some industrial uses and is also a key component in luxury items such as rings and necklaces.

And in a recession, few feel particularly luxury. The World Gold Council claimed that the demand for gold jewelry they plummeted nearly 40% in the first quarter compared to a year ago, while the demand from technology companies that use gold has decreased by 8%.
Gold at a maximum of seven years and bond yields flirt with record lows as fear grips Wall Street

A relatively strong dollar could also limit the rise in gold. Historically, gold prices have tended to thrive during periods of dollar weakness. But the US dollar index rose by about 4% this year.

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Some experts believe the dollar will inevitably weaken as the Fed continues to print money and the Trump administration and Congress may try to spend even more on bailout programs.

“The dollar is going better than other currencies at the moment, but it may retreat as people fear inflation from the trillion-dollar press,” said Ed Moy, strategic advisor to the gold bar producer Valaurum and former director of Mint of the United States.

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