- Spot gold prices fell below $2,000 on Tuesday in their biggest one-day decline in seven years, ending a multiweek rally.
- The precious metal recently hit its most expensive level — but analysts say a Joe Biden presidency and the distribution of a COVID-19 vaccine could derail its surge.
- Once owned by central banks and wealthy people wishing to preserve capital, gold has increasingly become the focus of retail investors, said Ole Hansen, the head of commodity strategy at Saxo Bank.
- Markets Insider compiled five reasons the outlook for gold is still bright.
- Visit Business Insider’s homepage for more stories.
Gold retreated below $2,000 an ounce on Tuesday, notching its biggest one-day fall in over seven years as investors cashed in on a rally that drove the price to unprecedented levels.
Gold has recently vaulted to record highs, driven by hopes that US lawmakers will approve another trillion-dollar stimulus bill to cushion the economic impact of the coronavirus pandemic.
Gold was up about 1.6%, at $1,954 an ounce, on Wednesday morning. On Tuesday, it crashed by almost 6%, or over $100, its biggest one-day loss since June 2013. It’s still up nearly 30% this year.
Governments and central banks around the world have unleashed trillions of dollars of aid to prevent the global economy from sliding into sky-high unemployment and mass bankruptcies.
The tidal wave of cash hitting the financial markets has lifted gold and several other assets, such as equities, near their highest levels. Gold has also benefitted from investors’ anxiety about an uncertain economic outlook and rising geopolitical tensions, most notably between the US and China.
Some analysts have said that a Joe Biden presidency in the US and an early rollout of an effective COVID-19 vaccine might derail gold’s surge.
“Every other fiat currency is being printed around the clock with reckless abandon and total disregard for savers, gold is the only currency that cannot be printed,” said Bryan Slusarchuk, CEO of the mining firm Fosterville South Exploration.
Several high-profile analysts have touted the possibility of gold rising to $4,000, and Slusarchuk said even $5,000 might be feasible.
“This will still be very inexpensive based on a variety of historically important metrics such as the Dow to Gold ratio, which now indicates either gold is extremely inexpensive or that large US equities are extremely overpriced,” he said.
Gold, once owned by central banks and very wealthy people to preserve capital and buy investment funds, has increasingly become the focus of retail investors, said Ole Hansen, the head of commodity strategy at Saxo Bank.
Here are 5 reasons the outlook for gold may still be bright
Fiscal stimulus and low global rates
Investors have flocked to gold this year partly because of the low-interest-rate environment, adding to a rally that has broadly been in place since last June.
The US government’s record-low interest rates to combat the harm of the pandemic have depressed the dollar and led to negative real yields, or those adjusted for inflation. This gives gold a competitive edge, as it bears no interest of its own and investors don’t sacrifice lost interest income by holding it when bond yields and savings rates are low or near zero.
A weaker dollar
The weakening dollar is among the market factors aggressively driving the push into gold.
When the US currency weakens, it makes assets priced in dollars, such as gold, more attractive. That has been a major catalyst for the surge in gold’s price over the past few weeks.
And despite investors’ hopes for a new stimulus package, deadlocked negotiations have not ignited dollar strength.
Investor flows into ETFs and futures
Worldwide gold holdings by exchange-traded-funds — which give investors exposure to the gold price without the hassle of owning and storing the metal — rose to 3,365 tons this year, Bloomberg reported.
That’s more than the gold held by the German central bank and second only to the US, which holds more than 8,000 tons of gold reserves and is the world’s biggest official holder of bullion.
Some large hedge funds have switched their exposure away from gold futures into ETFs, a popular investment vehicle for investors, because of recent volatility. ETFs are now a go-to option for anyone wishing to obtain exposure to precious metals; last week was especially strong for silver, as iShares’ SLV fund was one of the most widely traded on a retail platform.
Options positioning
Traders and investors in gold derivatives, a way of betting on future price movement, are overwhelmingly bullish through the rest of 2020, data from CME Group indicated: For every sell, or put, position for options that expire in December, there are three buy options held.
While forecasts for gold have ranged to $5,000, the most popular option is a December call option at $2,000 an ounce, meaning the owner of that contract is betting on the price trading at that level, at least, by the end of 2020. CME’s data suggests that some investors think the option to buy gold at $3,000 might also be a good deal by the end of the year.
An uncertain economic and geopolitical backdrop
At any given time, geopolitical risks are driving market sentiment. The outcome of the US presidential election is impossible to predict, and US-China relations have deteriorated, sowing some worries in otherwise buoyant markets.
Another threat to gold’s rally is the development of an effective COVID-19 vaccine that can be distributed widely and quickly. But in the meantime, the economic outlook remains uncertain, and growth is fragile.
Central banks are expected to be fairly slow in lifting their foot off the liquidity presses, meaning governments can let their economies create inflation as they recover. Rising inflation could play into the hands of holders of gold, which can act as a hedge against rising prices, while bonds are likely to be sold off as inflation erodes fixed-income returns.
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