The likelihood of further lockdowns, especially in Europe has gathered pace in the past two weeks. In the UK, where only a just under a month ago, the government was actively encouraging people back to the office, new, harsher measures have been put in place. Plans to involve the military in both Spain and the UK now exist. Global stock markets have thus reacted negatively to the news, as well as being disappointed with Federal Reserve Chairman Powell failing to articulate more detail regarding the Fed’s asset purchase program. It was perhaps the latter that has led to the move down in Gold. While Powell reemphasised the commitment to low rates, the absence of more concrete news for asset purchases could be identified as one reason while Gold trades just below USD1900 per troy oz.
From a technical perspective, it is crucial for the consolidation range to hold that Gold does not spend too much time under USD1900. However, from a COVID-19 perspective, which now looks to create either rolling lockdowns over the winter, or as in the UK where ministers have been preparing citizens for 6 months of permanently enhanced measures. Markets are becoming nervous. Such uncertainty usually benefits Gold. This is especially pertinent when politicians are using the carrot of the vaccine being approved soon versus what the actual reality could be. The Bernstein graphic below demonstrates what is realistic in terms of a vaccine arriving. And it certainty does not chime with the current hyperbole coming out of some senior politicians.
As can be seen mid 2021 is what Bernstein claim is the earliest before a vaccine can be approved. And that is before it is produced, distributed, taken by sufficient numbers of the global population and sufficient herd-immunity levels reached and maintained. Yet, even some major investment banks are talking about “investing in a post-vaccine world”. That seems hopeful at best, and reckless at worst. Especially, when markets remain near all-time highs and with all-time high valuations.
So the positive case for Gold in the medium and longer view remains. If the vaccine comes sooner than expected and the economy roars back to life then with so much money printing this past decade inflation could really move higher. And in contrast to previous inflation scares and shocks, which were commodity price based (OPEC Crisis 1970s, Gulf War, China in the early 2000s huge infrastructure build out) the next inflation move could come from a labour / wealth inequality and service sector level. This is because the gap between rich and poor is now so stretched and service sector driven inflation is so much more entrenched and structural than simple commodity demand spikes.
Furthermore, there are increased reports of de-dollarisation into precious metals, mostly into Gold. With the heightened domestic political tension in the United States showing no signs of abating even modest allocations away from the US Dollar into Gold will support demand. This is not just driven by the internal US situation but also by the geopolitical moves from a globalised world of norms and laws driven by US leadership to a more fragmented, less cooperative more competitive world.
Finally, such events have created feedback loops or “self-fulfilling prophecies”. In such situations Gold allocations rise, creating more news flow and interest, thereby creating more buying and interest further enhancing the secular bull-market that is being seen now. This also occurs geopolitically. As states retreat inward and supplies chains are domesticated from abroad there is less need for the USD as a global currency as an increasing component of global economic activity remains within the sovereign state. Global capital flows decrease and everyone, from individuals to family offices, to banks, to pension funds decrease USD holdings and replace them with Gold.
As the world wakes up to the efficacy and real long-term safe haven of Gold again allocations will increase. This will take some time as many still believe that Gold is a relic of the past or is just a pretty, but useless metal.
The risk events ahead, the ones we know of at least, are clear. The return of COVID-19 lockdowns globally and the US Presidential election will determine the short-term move in Gold. There is increasing speculation that a Biden presidency will be positive for Gold as he will likely be happy with increasing the deficit further, borrowing more and focusing on policies that are deemed less conducive to the economic good. Time will tell of course, but what is clear, right now, is that Gold continues to gain favour whether it be via increased allocations or increased general acceptance as a crucial component of a diversified portfolio in these rapidly changing and uncertain times.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.