Does Gold Have Further to Run?

Giles Coghlan

What we do know is that even with many countries across the globe beginning to relax their lockdown measures, we appear to be reaching the top of the curve as far as the global death toll is concerned.

Gold has come down off its recent highs to trade somewhere in the middle of the range it’s been in since mid-April. This has caused many traders and investors to begin to question whether they should start looking for dips to buy, or whether there is a further downside in store for the precious metal. We’re now halfway into the year and barring any other significant global events in H2 it’s almost certain that 2020 will be remembered as the year of the virus. The question remains, though, will 2021 be the year of the recovery?

Overly optimistic?

It pays to keep in mind that sentiment tends to over-correct in both directions. When news is negative, it can begin to discount all evidence to the contrary. When it’s positive, it can become unrealistically optimistic. What we do know is that even with many countries across the globe beginning to relax their lockdown measures, we appear to be reaching the top of the curve as far as the global death toll is concerned. This could be due to the effectiveness of the measures that have been introduced, a heightened sense of alert in the public as they begin to return to their normal routines, and improvements in treating patients with the disease.

The euphoria of something as simple as being allowed outdoors is contributing to a collective sense that the worst is over and that everything will be back to normal soon. This sense of confidence has helped US equities to grind higher and has caused gold to dip below its 20-day moving average for the first time since early May. Is it unfounded though?

Back down to earth

Despite what the stock markets may or may not be doing of late, the prospects for a rapid global recovery seem tepid at best. Recently Fitch Ratings lowered its global GDP forecast for 2020 from -3.9% to -4.6% and stated that it doesn’t expect the global economy to reach pre-coronavirus levels until mid-2022. Growth expectations for emerging markets excluding China have also been cut from -1.9% to -4.5% as the front line of the virus’s spread appears to have shifted to the developing world in recent weeks.

So, with the much-vaunted V-shaped recovery likely to prove more elusive than many are expecting, gold may indeed have further to run. Particularly if the hopes of a vaccine being developed by the end of the year are dashed. This may be another example of unrealistic optimism. Leaving aside how time-consuming the development and approval processes for vaccines are, we have never managed to produce a vaccine against coronavirus that has been approved.

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The cases for Gold

Recently, metals traders have been treated to an uncommon sight as gold mining stocks have outperformed the FAANG stocks. This has been due to a combination of undervalued miners, overvalued FAANGs, rising gold prices, and depressed energy prices making these mining companies more profitable as well as more attractive to investors.

For those who prefer to trade the metal itself, the current bout of dollar strength has been dampening some people’s outlooks for the price of gold. However, if recent financial conditions have revealed anything to us, it’s that in a climate like this gold can indeed rise in tandem with the US dollar. And let’s not forget that the rest of the world doesn’t buy its gold in dollars. Gold has performed even better against other currencies, particularly emerging market currencies, going all the way back to the beginning of 2019. It’s looking as though this trend could be set to continue. Many of these economies have been hit with the economic fallout due to the global demand shock, closely followed by the spread of the virus itself. As their purchasing power erodes in the face of dollar strength, gold becomes an ever more attractive investment.

Add to this the fact that central banks all over the world are continuing to inject liquidity at an unprecedented rate and you have even more of a reason for gold to strengthen. Even if the US economy can still provide returns that outpace precious metals, as well as a strengthening the safe-haven currency, other countries can’t. So the case for holding gold if you’re European, Brazilian, Turkish or Japanese, for example, is only getting stronger.

Finally, gold as an inflation hedge is also likely to become part of this story, sooner rather than later. Ignoring headline CPI data, which has been registering the effects of a twin shock to supply and demand as well as a drastic change in consumption habits owing to the coronavirus lockdowns, there has been some evidence of food price inflation in both the developed and developing world. In the US, the closing of many meat-processing plants caused beef prices to surge by 4.2% and poultry by 4.7% in April. Egg prices spiked by 15% and bakery goods by around 6%. According to the Bureau of Labor Statistics, food-at-home prices increased by 2.6% in April, the highest such rise since 1974. In Sudan, the surging price of grains, meat, milk and bread led the country’s inflation rate to go from 82% to 99% from March to April.

Is it too late?

The question on the minds of many investors now is whether they missed the boat, or whether gold’s rally is just getting started. These are, of course, highly unusual times. The case for gold today is much different than it was in 2019, and many would say more urgent. However, it’s ultimately all about your time horizon. Gold looks as though it’s likely to rise higher in the medium to long term. It also looks just as likely to dip even further than it already has in the short term. These are the things that have to be borne in mind if you’re thinking of trading it. Could we see $2000+ gold in the coming year? Yes. Could it dip to $1500, or even below that, between now and then? Certainly.

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About the Author
Giles Coghlan

AGiles Coghlan is the Chief Currency Analyst at HYCM, one of the oldest brokers in the industry. Since joining the company in April 2018 Giles has played a key role in providing his expertise to HYCM’s investors.

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