Bullish vs Bearish sentiments for gold

Recession and pandemic have been good supporters for gold this year. Gold has advanced 16.7% since March 2019. Simultaneously the dollar has dropped 6.8%

All this while, gold continued to find additional support from some of the bearish factors including concerns over a second wave of infections, and raised geopolitical uncertainty.

This week too, gold found support over Federal Reserve statements. Fed ruled out any rate hikes for the next couple of years. On Wednesday, the Fed announced that it is keeping its key interest rate unchanged at a range between zero and 0.25% while signalling no rate hikes through 2022. The Fed also said it expects U.S. GDP to contract by 6.5% this year.  Simultaneously it boosted expectations that [quantitative easing] will be in operation for the time being.

In response, gold prices rallied, reaching slightly above $1,750 an ounce on Thursday while equities saw major losses. This move benefited gold as an accommodative monetary policy is negative for the yields and for dollar, while positive for the yellow metal hence gold managed to pull through the mid-range resistance band of $1700/$1725.

Any form of strong financial stimulus is made with the intention of boosting the economy. Now given the situation, the market is once again divided into bears vs. bulls for gold.
The ones, who are bearish, have cautioned that gold will remain in a tight range. Currently it has been sustained by stimulus measures world over and hence it will require a very strong influencer to pull it back into a higher range.

The Fed’s extreme money printing igniting these unstable stock-market heights is worryingly inflationary, making upping gold portfolio allocations essential.  This ongoing capital shift is likely to keep pushing gold higher. RiddiSiddhi Bullions Limited is positive that gold prices are likely to trade higher for the most part of the year.

But still many investors continue to remain in a dilemma about portfolio diversification per se gold.

Now for the ones who are bullish believe that gold is being constantly supported by the current geopolitical crisis. There has been news that the number of U.S. coronavirus infections were rising, with recent reports indicating that Arizona and Texas are showing increased cases. Moreover, worries of a new wave of COVID-19 cases clouded hopes of economic recovery.

Just when China was grounding itself towards economic recovery, it once again saw fresh Covid cases resurfacing. After weeks with almost no new coronavirus infections, Beijing has recorded dozens of new cases in recent days.  And if this was not enough, US too witnessed Covid hospitalization in record numbers.

Further, The World Bank released its latest economic outlook and global GDP which is now predicted to fall by 5.2% this year. The recession could be the worst since the Second World War. Certainly, lockdowns are being eased and central banks and governments have pledged huge sums of money to support their economies. However, the economic recovery will take quite some time and even a slightest onset of a second wave of Covid infections, will once again create a panic like situation believes Mr Prithviraj Kothari of RSBL.

This comes amid enormous federal rescue efforts, with the Treasury Department aiming to borrow $3 trillion to cover the tab. To bolster the government’s campaign, the Federal Reserve intends to buy enormous amounts of the new Treasury bond supply. This manoeuvre is called quantitative easing (QE), which also is aimed at holding down interest rates.

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.