QE, Stock Bubbles, Coronavirus and Gold

The USD gold price did tank during the 6 and 19 March this year, as a result of huge sales of gold contracts, mainly at COMEX. Holder of gold contracts (futures, options, ETCs etc.) were massively selling their contracts, trying to convert preferably gold contracts to cash, as the gold market is one of the most liquid markets globally. Coronavirus did rightfully irritate investors and thus caused panic. However, if gold is compared with stock markets on the medium term and longer term, we see that gold is still a safe haven. And it will stay as a safe haven.

A quick glance on the above table shows the price development of gold and silver, compared with oil and selected common stock indices.

People who trust in gold as a safe haven buy and keep physical gold and do keep it on the long term. People who bet on a short- or medium-term price movement (either up or down) invest in gold contracts, including so-called gold-backed ETFs. The preference for physical gold to preserve wealth is clear; only physical gold has an inherent value without being exposed to risks that may come from any counter-liability, being the liability of issuers.

While all stock indices created serious losses during the last three, six and twelve months, most of them in the double digits up to -25%, only gold provided its holders with a substantial gain, proving its quality as a safe haven.

The World Gold Council just announced that Central Banks currently hold almost 34.000 tonnes of gold as reserves, equalling to 17% of all gold above-ground globally.

While safety and liquidity are paramount for reserve managers, the World Gold Council said further, returns are important too: gold has provided an average annual return of nearly 10% in US dollars since 1971.

Central banks may base their investment strategy on numerous factors, but the primary reasons for recent gold buying are: heightened economic and political risks, low and negative interest rates, and allocation re-balancing.

Silver did not make its holders happy during the last 12 months. But forward-looking investors see this as a serious gain potential, as silver looks undervalued.

Where will the gold price head to?

The US investment bank B. Riley FBR upped its gold price forecasts for Q3 and Q4 2020 to USD 2.500 per ounce.

“Regardless of how much longer recession conditions will continue and how much further general equity markets might retreat, extreme monetary and fiscal stimulus policies being enacted on a global basis will have repercussions,” B. Riley FBR’s note stated. “These repercussions will likely parallel 2009-2011, and drive gold price to new highs.”

The stock markets are creating bubbles over the last years. Investors do not invest in stocks based on companies’ real value and market perspectives but based on the speculations of other investors. How else could the stock prices of companies like Tesla, Apple, WeWork and others be explained? Stock investors are building up each other’s investment momentum and are led by that momentum, losing any connection of their investments to the reality of the companies of which they trade shares.

QE, Quantitative Easing, or the artificial creation of funds through indebting and re-indebting debts, does not suggest any trust in money markets anymore. Global corporate and public indebtedness are reaching 250% of the global GDP. Almost 50% of US corporate debt is one step away from junk.

Coronavirus and Gold

The recent tumbling of the gold price by about 13% was caused by the market irritation as mentioned at the beginning of this article. 13% tanking was moderate compared with stock indices. Since 20 March, the gold price recovered, reaching USD 1.632 right now (26 March 2020, GMT 3:22pm), returning to a price level that is supported by fundamental measures.

Apart from that it seems that there will be another impact which might further push the gold price up.

Italy is expected to lose 12% of its GDP in 2020, Spain 11 and Germany 8%, just to name a few. Economists in the US expect a drop of production in 2020 of up to 24%.

The coronavirus pandemic will be handled within a few months as it seems. Hopefully!

However, the economic damage created by the pandemic will not be repaired or compensated within a few months. Expected USD 3,4 trillion loss in salaries alone will be a serious obstacle for consumption increasing again once the pandemic ends and shops open again.

Central Banks will try to fight the lack of consumption with even more QE, which will erode trust in the monetary systems and their managers even more as well.

That’s why the US investment bank B. Riley FBR upped its gold price forecasts for Q3 and Q4 2020 to USD 2.500 per ounce.

As a consequence of the above situations, experts do not expect the demand for physical gold decreasing during this year, at least.



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