Despite increased volatility over the US election and the news of an effective Covid-19 vaccine gold remains stuck in the consolidation between USD1850-1950.
So, while the dramatic intraday sell-off in gold after the Pfizer vaccine news felt severe, on a longer-term time frame the picture remains fairly similar. Indeed, the fact that gold remains in this range, with such hugely positive news for the economy, can be seen as very encouraging. It shows that gold is not being owned just as a play on the pandemic, but rather for a whole host of additional reasons.
First, more stimulus is coming regardless of vaccine news. The vaccines themselves still need to be produced, distributed and taken by billions of people until sufficient immunity is developed. Estimates for this to be achieved range from summer 2021 to spring 2022. Thus, in the meantime there is still a threat of more lockdowns (as Austria did this week) over the coming months. In both Europe and the United States the virus remains rampant. Yet Congress cannot seem to get a stimulus bill passed, and it now looks possible that it will now come next year.
The European Union is also struggling to finalise its stimulus package:
However, seasoned political analysts expect both the EU and the United States to get their respective packages across the line sooner rather than later.
Second, the pressure to cancel all US student debt is ratcheting up. Such a step in a capitalist economy, especially in such vast amounts of money, has worried many commentators that this sort of policy opens up Pandora’s box for other forms of debt relief:
The total student debt in the United States is approximately USD1.68 trillion at the moment. And cancelling even some of that would certainly set a precedent. Markets would begin to wonder what would be next. There is a huge amount of pressure on President-Elect Biden to act on the issues, even by bypassing Congress with an executive order.
Third, Central Bank policy remains the same. It is still extremely expansionary and until inflation arrives will remain so. Indeed, the groundwork is being laid for future plans to make the unthinkable thinkable. In the UK for example, there seems to be a deliberate and focused media effort to prepare the public for the possibility for negative interest rates.
In addition, as mentioned in the headline above, Central Banks are also preparing the groundwork for digital currencies. This would further increase their power and influence over citizens’ lives, create huge privacy issues. It would also dramatically increase dependence on Central Banks.
Having wealth as a store of value that is entirely dependent on a Central Bank is clearly not an attractive idea for many investors. This can be seen in the recent move of Bitcoin to new highs.
Fourth, the fear of inflation as the world moves beyond Covid-19 is emerging. The Federal Reserve has indicated it will let its inflation target overshoot, and the ECB and Japan have been praying for inflation for years which has not materialised as of yet. If the economy roars back to life next year, then inflation could really move. People under lockdown are frustrated and there will certainly be a sense of “life is short” so let’s spend.
Fifth, there is a general consensus (not always correct it should be added) that the US Dollar will depreciate significantly next year. This usually helps gold. One of the reasons stated is that more and more countries will diversify their FX reserves away from the US Dollar and that the Chinese Yuan will eventually be a beneficiary. Ray Dalio, the famed macro hedge fund manager of Bridgewater Associates said:
China is now one of the world’s largest trading powers, but its currency makes up a small fraction of global reserves, world trade invoicing, and cross border lending, Dalio said at the Caixin Summit in Beijing on Saturday via video link. Meanwhile, the U.S. dollar accounts for over 50% of global reserves and trade invoicing, and about 60% of global lending.
While this point is a longer term one, it is an important secular driver of flows away from the US Dollar and into other assets such as gold.
The five points listed above are all reasons, and long-term ones at that, why many investors and asset allocators will continue to add to their gold portfolios on any dip. It is also why despite what many thought would be very bad news for Gold (the highly effective Covid-19 vaccine, the price has remained within its recent range.