Investors remain bullish for gold

Gold bounced sharply from its mid-March lows as central banks slashed interest rates and launched quantitative easing, while governments undertook massive stimulus measures, in an effort to combat an economic slowdown prompted by the COVID-19 pandemic. However, gold has been largely range-bound for nearly two months now.

Investors as well as industry experts like RSBL continue to remain bullish for gold mainly due to the following reasons-

• FED - QE is “huge positive” for gold since it means a low “opportunity cost” of holding the metal. This refers to any interest income lost by holding a non-yielding asset such as precious metals instead of bonds. The Federal Reserve (Fed) will face numerous challenges in the months and years ahead. Economic output will remain below potential for years to come as we deal with the pandemic and its long-term scarring effects. An additional challenge will be a U.S. federal government budget deficit that will exceed $3 trillion this year with significant likelihood that it could be larger.                                                                                                      
• Unemployment numbers and S&P weak earning and its effect on interest rates - Unemployment is expected to remain high and S&P companies to continue posting weaker earnings. This would lead to lower (or increasingly negative) real interest rates, which is positive for gold. Absent further action by the Fed, the deluge of Treasury securities will likely start pushing interest rates higher, threatening the overall economic expansion. The Fed cannot allow this to happen.  As I gaze into my crystal ball, the Fed’s roadmap is likely to include the following progression of policy tools as the economy remains mired in a protracted downturn                                                                                                                                                          
• US Economy - With the Fed going all-in on financing the government deficit, the U.S. dollar could be at risk to negative speculation of its status as the dominant global reserve currency. Investing in gold may help offset this trend.                                                                                                                                                          
• Fiscal and monetary stimulus programs across U.S., Europe, China and other countries - this action is but obvious given the damage that COVID-19 has caused globally. As we move towards the path of recovery, which will definitely be slow, gold is expected to benefit from this.                                                                                                                                                          
• Equities - For one thing, the relief rally in equities is likely to eventually run out of steam. The economy still faces challenges, one of which is the potential for a second wave of COVID-19 infection which will further strengthen gold prices.

Gold has always been investors favourite because of its following features-

• Historical position
• Long term store of value
• Performance during times of crisis
• Effective portfolio diversifier
• High liquidity asset

Due to this, gold has gained more prominence every time the global markets face uncertainty. And we think this sentiment will carry through in late 2020-2021 says RiddiSiddhi Bullions Limited.

Gold prices should comfortably break through $1,800 an ounce, whenever the sharp rally in equities stalls,  when gold ran up to its record high above $1,920 an ounce back in 2011, the market was in “bubble-like conditions” that did not last long before the buying dried up. But in the current situation, many more economies around the globe have been impacted, meaning a recovery will take longer, in turn meaning gold buying should be more sustained.

Geopolitical crisis still remains on the cards for gold

Gold has been a major beneficiary of a weak dollar and low US interest rates over the last three weeks and this looks likely to change in the short-term. The yield on the 10-year US benchmark is nearing 1%, up from 0.65% a week ago, dulling the appeal of the precious metal, while the US dollar basket may have found a temporary base around 96.50 after having fallen by four big figures since mid-May. Bullion has declined about 3% last week, on track for its biggest fall since the week ending March 13.

Gold prices dipped more than 2% on Friday as investors’ hopes of a rebound in the global economy got a boost from stronger-than-expected U.S. non-farm payrolls data, reducing demand for safe havens.

RiddiSiddhi Bullions Limited opines that a record surge in US employment on Friday sent gold into a tail spin and back to lows seen at the beginning of May. Just over 2.5 million jobs were added in May compared to market expectations of 8 million lost jobs, the largest month of job creation since the data series began. Last month the US economy lost just over 20 million jobs. Today’s positive data boost added to an already upbeat market tone and helped push gold back into the early $1,680s, its lowest level since May 2.

The May payrolls report confounded economists who had predicted a job loss of 8 million in May as the coronavirus kept parts of the U.S. economy closed for a third straight month.

The report also jarred with separate data released a day earlier by the Labour Department, which said it received weekly unemployment claims for the first time from 1.9 million Americans, bringing to nearly 43 million the number receiving jobless insurance since the Covid-19 hit home in March. Gold prices jumped 1% on Thursday, reacting to the jobless claims numbers.

We had significantly stronger-than-expected U.S. payroll numbers - an increase of 2.5 million versus an expectation of a decline of 7.5 million - that 10-million swing has brought forward expectations of the economic recovery in the United States.

A kick-start to another rally in the gold price remains elusive. The market’s confidence that the most acute stage of the pandemic has passed in many countries has seen risk appetite improve. With investors now betting stimulus measures will bridge the gap to more normal growth. RSBL is positive and has hopes pinned to an improved economy.
The central bank has injected massive stimulus and cut interest rates to near zero to cushion the blow from the coronavirus pandemic. The Federal Reserve, the U.S. Treasury and Congress have jointly approved and disbursed trillions of dollars in loans, grants and outright aid to businesses and individuals in recent months because of the Covid-19-triggered economic downturn.

But investors still remain bullish over the medium-term. Prithviraj Kothari and many other top gold dealers in India believe that Gold might not get much more support from the Fed, but geopolitical risks, second wave concerns, and an eventually weaker U.S. dollar should keep the longer-term bullish outlook intact The macro backdrop is challenging, despite market confidence in the trend towards normalised growth. The expansion of central banks’ balance sheets shows no sign of abating, while geopolitical tensions escalate.

The otherwise safe-haven known as gold is rallying right alongside an equities markets surprisingly chock-full of momentum even as protests sweep the U.S. and deaths from COVID-19 continue to climb.

Some analysts, however, remained optimistic that gold would regain some upward momentum in the near-term despite the risk rally in stocks.

The reason being uncertainty- geopolitical issues and trade tensions (in the U.S) still remain on the cards and for the longer term these factors will definitely influence gold prices positively and those who strongly believe this and are still favouring gold are expected to benefit in the long run.