The Fundamentals for Gold Are As Strong As Ever

Although businesses are reopening, the economy faces multiple headwinds, including massive debt and deficit spending. Here's why that's good for gold.

As businesses slowly reopen after nearly a three-month lockdown, FXEmpire's Arkadiusz Sieron delves into what Americans, along with gold investors, can expect as the climate normalizes. Although dubbed the "Great Unlock", the reopening isn't a single sweeping action performed by the government, just as the lockdown wasn't.

Sieron notes that various state-level entities, as well as citizens themselves, began applying preventive measures before any governmental say-so and, in some cases, extended the measures past the mandatory level. Similarly, the reopening of the economy and the continuation of business will be far from the flip of a switch that some are expecting.

As an example, Sieron points to the restaurant industry, which accounts for around 16 million jobs in the U.S. Even if the government was to allow all establishments to fully open up, many consumers would find themselves with a newfound skittishness in regards to being in a large and dense crowd. 

This is just one example of how the economy could struggle to get back on its feet for some time.

This brings Sieron to the idea of a V-shaped or quick recovery, one which many are hoping for, and yet one that even the Federal Reserve isn't too optimistic on. All of these issues tie closely to gold and how the metal was performing throughout the pandemic.

It's no secret that the metal was the best-performing asset during the onset of the lockdown, as unprecedented uncertainty caused it to soar to seven-year highs. As one might infer from gold inching just below $1,700 last week, traders are likely hoping that the heaps of stimulus and heightened economic optimism will pour over into the coming months. In truth, however, the global economy was far from flourishing heading into the pandemic.

Interestingly enough, the broad asset sell-off in March was the first major hurdle that gold experienced in more than six months, as the metal had been climbing due to numerous sturdy fundamentals. The tables began to turn around mid-2019 as central banks embraced low or negative interest rates, which have all but become the norm as a response to the pandemic. The slicing of benchmark rates brought to the forefront all of gold's strong tailwinds, which many pointed to as the metal's perfect storm.

To be sure, the return to pre-pandemic economy strength will be a gradual process, with plenty of question marks along the way. Yet perhaps the most important takeaway for gold is that the global economy was in a state of contraction prior to any mention of the virus, while the domestic economy was feeling the weight of seemingly unsolvable debt and excessive fiscal spending, along with a host of other issues. Besides potential currency debasement as a result of stimulus measures, the pandemic could also strengthen gold's upwards trajectory by greatly exacerbating the issues of federal and national debt, to speak nothing of the economic sluggishness itself.

UBS Predicts Higher Gold Prices in Near Future

A strategist from the bank explains their bullish outlook, particularly regarding the shift in investor sentiment brought on by the global pandemic.

In a recent interview with CNBC, Joni Teves, a precious metal strategist at UBS Investment Bank, shared the bank's outlook for gold over the coming months, particularly regarding the shift in investor sentiment brought on by the global pandemic.

According to Teves, the slump that gold experienced during March's broad market selloff is long gone, and the metal is primed to continue climbing as it has been doing since mid-2019. Over the past weeks, gold has consistently closed trading sessions around $1,700, with frequent climbs to around the $1,720 level.

Teves and her bank believe that the steady upwards trend will continue, placing $1,790 as the target level for gold in the short-term. Over a slightly longer period, Teves thinks that there is plenty of room for gold to move past $1,800.

Speaking about the reasons for her bullish forecast, Teves explained that investor interest in the metal continues to grow, both among individual investors and funds that were short gold not too long ago. Teves attributes this to nearly unprecedented levels of uncertainty and expectations of low growth that were a significant talking point even before the pandemic hit. Likewise, plummeting interest rates will diminish the appetite for bonds, lowering the amount of choices investors have to hedge their portfolios and diverting attention to gold.

Fat Prophets' resources analyst David Lennox shares the view that central bank actions will continue to greatly benefit gold from various angles. Whereas certain currencies might have been seen as a safe or attractive investment prior to the coronavirus outbreak, the debasement of fiat due to monetary stimulus will rapidly change this notion. Lennox, like many other analysts, also points to the worrisome issue of global debt, one for which there is no solution in sight and will greatly worsen as various governments scramble to mitigate the damage to their economies caused by the coronavirus.

As a side note, the World Gold Council's end of April report revealed that the coronavirus was the biggest driver of gold demand, with investors piling into the metal and funds buying the most gold they have in four years. Prior to the coronavirus, global central banks were spearheading bullion demand and have doubled their yearly purchases between 2018 and 2019. Keeping the WGC's report in mind, it should be interesting to see how the gold market's demand dynamics move, along with the figures themselves, as the situation progresses.

Gold on Track for Best Year Since 2010

A struggling U.S. Dollar helped boost gold at end of year, acting as the metal's biggest driver.

As seen on Reuters, gold recently hit its highest level in 2 and a half months, putting it on track to its best year since 2010. The metal rebounded towards the end of the year due to a myriad of factors, most of which, according to the article, had to do with the U.S. dollar.

The greenback had a difficult year as several geopolitical events subdued it. Aside from increasing the appeal of owning gold, the article states that the U.S.-North Korea conflict also harmed the dollar, giving more ground to the yellow metal.

Persistent low inflation in the U.S. remains a significant headwind for the dollar. The article references Georgette Boele, an analyst at ABN Amro, who said that inflation concerns allowed gold to thrive even after three interest rate hikes by the Fed in 2017. The same concerns have also impacted market sentiment, letting gold hold its ground against rate hike predictions in 2018.

Boele added that the dollar remains the most important driver of gold prices, followed by yields. Aside from a dollar that didn't profit from successive rate hikes, 2017 also saw weak trade and meager yields, both of which bolstered gold. While Boele said that a recovery in the dollar could harm gold prices in 2018, it's worth noting that the issues placing pressure on the greenback are still ongoing.

As the dollar had its worst showing in three months with a potential to post its worst year since 2003, gold breached the $1,300 level to hit $1,302 an ounce this past Friday afternoon. The article notes that ScotiaMocatta's technical team pointed to $1,306, gold's October high, as the next level gold could capture before the year ends.

The analysts said that gold has benefited from technically driven momentum, adding that the metal broke its 100-day moving average in a markedly positive development. With enough strength in the closing days of 2017, gold is poised to have its best month since August.

Other precious metals also enjoyed a favorable year, with palladium's gains standing out the most. The metal recently hit $1,072, its highest level since February 2001, amid worries over availability after years of market deficit. Palladium enjoyed an unusually large premium over platinum in the fourth quarter, with the latter rising 3.8% this year.

Silver's gains were somewhat higher, having risen 6.5% so far this year, last closing at $16.97 an ounce.