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Gold price outlook for April: Can gold continue to outperform equities?

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(Kitco News) Gold played a key role during a historically poor first quarter as equities around the globe suffered massive losses amid COVID-19 panic. Going forward, the yellow metal continues to be a must in a well-diversified portfolio, according to one investment manager. 

“Given the current monetary environment investors face, and the ongoing economic and financial market risks, there is little reason to believe the long-term upward trend in gold prices will change soon,” The Perth Mint senior investment manager Jordan Eliseo said Monday. “The yellow metal looks set to remain an important asset in well-diversified portfolios.”

There are four key drivers that are likely to push gold prices higher in April: increased investor demand, monetary policy and fiscal stimulus, negative real yields, and gloomy economic outlook, Eliseo highlighted.

Even though some COVID-19 panic has abated, there is still a lot of uncertainty around when the economies in North America and Europe will start to recover following all the shutdowns.

“Continued uncertainty regarding the impact of coronavirus on economic growth should also help support gold, even if a global recession is now the 'base case' for most investors,” Eliseo wrote. “There is also the question of whether or not we will see a V, a U or an L shaped economic recovery once the threat of coronavirus has been sufficiently contained.”

On top of that, gold is continuing to look very confident in comparison to equities. “Gold is strongly outperforming equities, with the S&P 500 to gold ratio dropping from 2.13 at the end of December, 2019 to 1.77 by the end of March, 2020. This should help attract additional inflows from investors,” Eliseo said. “Investors need to bear in mind that whilst equity markets are cheaper, they are hardly cheap.”

Longer-term, it is unclear whether gold can sustain its out-performance of equities, especially as they begin to recover after such a dismal quarter. 

“Coming off one of the worst quarters on record, one would not be surprised to see a rally, especially given the sheer scale of monetary and fiscal stimulus being deployed across the G20. Indeed, some equity markets already rallied almost 20% in late March,” the investment manager added.

Working in favor of gold are the monetary and fiscal stimuli, which do not have an upper limit with the balance sheet of the U.S. Federal Reserve already exceeding $5 trillion. “The majority of global sovereign debt now trades at negative real yields, making gold a high yield (and zero credit risk) investment in comparison,” Eliseo added.

While these drivers will continue to support gold at higher levels in April, some headwinds to watch out for are higher U.S. dollar and low inflation, Eliseo added.  

Strong U.S. dollar could hold gold back in April, especially if there is a “sharp spike” higher, he noted, adding that temporary low inflation expectations could also weigh on prices. 

Russia's central bank stopping its official gold purchases for the foreseeable future is another downward driver in addition to the sell-off in silver and gold stocks. 

“Strong precious metal bull markets often see silver and gold stocks outperform gold to the upside. This has not happened this time, with the gold to silver ratio ending Q1 2020 above 110, a huge increase from end 2019 when the ratio was just 85. Gold stocks (as proxied by GDX) were also down, falling by over 20% for the quarter,” Eliseo described. 

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