- Gold price forecast to rise 12.5% by year-end at Goldman Sachs.
- As coronavirus policy response stokes fears of USD debasement.
- Amid strong parralels between the coronavirus and financial crises.
- $1,800 targeted while charts suggest return to all-time high possible.
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The gold price was trading near to multi-year highs on Thursday but has been forecast to rise another 12% before year-end as the coronavirus response of the Federal Reserve (Fed) and other central banks stokes debasement fears and demand for the “currency of last resort”.
Gold has been volatile of late much like all other assets but the precious metal is now entering a rare period in which its safe-haven qualities could drive outperformance as investors navigate a coronavirus crisis that’s elicited a central bank response like no other which has already seen policymakers flirt with the idea of rewriting the monetary system's rule book.
The Fed has announced “unlimited” quantitative easing after burning through nearly half of a $700bn allocation for bond purchases within a fortnight of announcing the effort to support the U.S. economy by bringing order to a market that fell almost as sharply as risk assets at times this last month. That policy response is being augmented by interest rates that are at the ‘zero lower bound’ and an estimated $2 trillion fiscal policy response that includes ‘helicopter money’ for households and business loans being extended directly from the balance sheet of the Fed in some cases.
America’s slow-in-the-making, but nonetheless unprecedented policy response has already called a halt to a vicious surge in the U.S. Dollar, which was the only beneficiary of a March 2020 financial market meltdown, but will add double-digit percentages to an already bloated long-term liability side of the national balance sheet over the coming years. This, as well as the prospect of policymakers being forced to resort to further extremes before the viral pneumonia crisis is over, has been a gamechanger for the gold price outlook and has lent support to bullish forecasts for the performance of the yellow metal.
“Inflationary concerns should further support gold prices as the currency of last resort,” says Jeffrey Currie, head of commodities research at Goldman Sachs. “We are likely at an inflection point where Fear’-driven purchases will begin to dominate liquidity-driven selling pressure as it did in November 2008. As such, both the near-term and long-term gold outlook are looking far more constructive, and we are increasingly confident in our 12-month target."
Above: Gold futures price shown at daily intervals alongside Dollar Index (black line).
Gold prices have trended higher since October 2018 when the Fed signalled that an end to its interest rate hiking cycle could be drawing near, which encouraged speculation of a turn lower in the U.S. economy and Dollar, but gains have increased sharply this year and in the last week. The gold price was up 8.8% at $1,602 on Wednesday and was carrying a whopping 21.7% gain for 2020 at the same time, after having traded as high as $1,681 in recent days after events in broader financial markets evoked bitter memories of the financial crisis period in which an experiment with quantitative easing stoked debasement fears and drove the Dollar into the ground.
Currency debasement raises the cost of imports and lifts inflation while reducing the real value of money in the process. And if inflation fears are not already as palpable as they were back in 2008, they could be soon given that U.S. policymakers are not alone in having pushed the crisis-fighting toolbox to fresh extremes. Everywhere, and especially on the already-heavily indebted European continent, central banks are launching expanded quantitative easing programs and governments are preparing to borrow double-digit percentages of GDP from bond markets to finance support packages aimed at keeping companies and households solvent amid ‘lockdowns’’ of citizens unprecedented in democratic countries. Those measures have been deployed increasingly in order to contain the spread of the coronavirus.
“The recent aggressive global CB action ensures a stronger and more bullish longer term platform (Gold should wake-up to the impending global over indebtedness, restrained growth, more experimental CB policies and income supporting programs / helicopter drops resulting in dilutive currencies and historically low real rates). The stimulus backdrop has emerged the past few days and is growing, but the greenlight needs to stem from a reduction in panic selling across all assets, a dial back in peak fear,” says Nicky Shiels, a metals strategist at Scotiabank. “The recent tentative hold around $1450 is a constructive development, perhaps marking that the indiscriminate selling is nearer the end, at the very least some decent buying & conviction.”
Above: Gold futures price shown at weekly intervals.
Gold has little practical use outside of the jewellery industry but it’s long been seen as an ideal store of value and therefore, a hedge against inflation, in times of financial crisis. Its widespread acceptance as collateral as well as its convertibility into almost any currency bolsters the metal’s appeal to investors when correlations between asset classes have turned positive and prices are plummeting, as they typically do during crises. This month the safe-haven bond market saw large losses at the same time as stock markets and all non-U.S. Dollar currencies were crushed amid an exodus of capital that was driven by an explosion in demand for the liquidity of cash. Many analysts say this cash demand was driven by ‘margin calls’ relating to wagers on riskier assets while others have suggested it was the result of a desire on the part of investors to stay liquid and therefore, to become lighter on their feet.
However, and what matters most for the gold price outlook is the fact that investor confidence has cratered, liquidity demand is still high and the prospects of the negatively-correlated Dollar are in doubt. The greenback has a negative correlation with the metal because gold prices are denominated in Dollars and although the currency has strengthened since the onset of the coronavirus outbreak in major economies, as it did early in the financial crisis, the inevitable policy response from central banks and lawmakers now looks set to weigh on the U.S. unit. Exactly as it did in the financial crisis.
“Gold has been severely impacted by liquidity issues, correcting by $120 (-7%) from its peak. The situation resembles 2008, when gold also failed to act as safe-haven asset initially, falling by around 20% due to dollar strength and a run into cash. In 2008, the turning point was the announcement of $600bn QE in November, following which gold began to climb despite further weakness in equities and commodities,” says Goldman’s Currie. “With funding stresses likely eased, focus will likely shift to the large size of the Fed balance sheet expansion, increase in fiscal deficits in DM economies as well as issues around the sustainability of the European monetary union. We believe this will likely lead to debasement concerns similar to the post GFC period.”
Goldman Sachs forecasts a gold price of $1,800 on a 12-month horizon, which is the target envisaged in the ‘bullish scenario’ of Scotiabank this year. Meanwhile, technical analysts say that once the $1,704 level has been overcome on a daily closing basis the market could then turn its attention to the $1734, $1796 and $1,803. And that so long as the current uptrend holds, a return to the all-time high of $1,921 set back in 2011 cannot be ruled out.
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