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Gold continues to benefit from Federal Reserve monetary stimulus

Commentaries & Views

For the last six weeks gold futures have traded from a low on the week of March 16th at $1450 to current pricing today of $1750, a $300 price gain. Historically speaking, another instance when gold was able to move $300 in a six-week period started during the week of July 18th 2011, when gold was trading at just around $1600, and by the week of August 8th, 2011 was trading well above $1900 per ounce. In both instances the underlying cause for gold prices to rise so sharply was Federal Reserve quantitative easing and a relaxed monetary policy.

While the underlying reason that prompted the Federal Reserve to act was entirely different, in both instances, the initiation of quantitative easing has had the same effect, taking gold prices dramatically higher in a short period of time. The rise in 2011 was a direct result of quantitative easing, and the initiation of a much looser monetary policy by the Federal Reserve. These actions were designed to help the United States dig out of a deep financial banking crisis which began in 2008.

This current crisis is so much more complex than the crisis of 2008, as it is affecting almost every country in the world. While this crisis is based on a medical pandemic, the global economic contraction is greater than any we have witnessed since the great recession.

On March 15, 2020, the Federal Reserve announced it would revive the QE program. It would purchase $500 billion in U.S. Treasuryâ??s and $200 billion in mortgage-backed securities over the next several months.

Not only are global banks attempting to keep many businesses afloat, but the biggest issue is the rising unemployment rate as the pandemic has virtually placed the world in in an invisible lockdown. Millions of jobs have been either furloughed or lost, and many global citizens are unable to provide an income for the family.

It is for that reason that once the pandemic has subsided, either by the creation of an effective vaccine or medication to stave off spread of the coronavirus, the economic fallout will continue for many years after that.

The Federal Reserve as well as other central banks are attempting to reverse the harm caused by this global pandemic. The Fed has cut rates to near zero and unleased the most massive quantitative easing program with a mandate to purchase an unlimited amount of assets. Add to that is the fiscal bills passed by Washington, the first of which was a program to infuse 2.2 trillion dollars in aid to failing U.S. businesses. And this week Washington added another $500 billion to the aid package.

Both the Federal Reserve as well as the major global central banks, including the ECB and Bank of Japan have indicated a willingness to implement any steps necessary with a â??whatever it takesâ?� attitude to mitigate the inevitable economic fallout which will last far beyond the pandemic itself. These central bank actions have the net result of devaluing their currencies, and has reinvigorated investors desired to move capital into a safe haven class such as gold.

It is for this reason that many analysts, including myself, are forecasting much higher pricing in gold through the end of this year. The Swiss private bank Union Bancaire Privee (UBP) believes that gold will breach the all-time record high of $1920. Analysts at Bank of America are forecasting that gold could reach $3000 within the next 18 months.

According to AxiCorp Financial Services Pte Ltd market strategist Stefan Innes remains bullish on gold due to the level of central bank stimulus and physical support coming from governments which inevitably will create much more government debt.

Our technical studies indicate gold could trade as high as $1880 per ounce by the end of the year. More importantly we believe that by the second quarter of 2021 gold prices will have breached the record high of $1900, and trade is high as $2000-$2300 per ounce.

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Wishing you as always, good trading,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.