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Commerzbank sees $1,800 gold prices as investors seek 'last-resort lifeline'

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(Kitco News) -  Investors are turning to gold as a safe haven and “last-resort lifeline” amid the COVID-19 pandemic, which has led to massive fiscal stimulus and ultra-loose monetary policies around the world, said Commerzbank in a revised forecast Wednesday.

Analysts say they look for $1,800-an-ounce gold at the end of 2020.

Spot gold on Tuesday traded nearly up to $1,750 an ounce, its strongest level since November 2012, before backing off on Wednesday. At its recent peak, the metal was up by nearly $300 since mid-March, which Commerzbank said is “all the more remarkable” considering the U.S. dollar also remains strong.

“Normally this would exert pressure on gold, but in a market environment characterized by great uncertainty about how the corona crisis will develop, and the fact that its economic impact is almost impossible to put any figure on, gold is able to hold its own against the U.S. dollar, which is likewise regarded as a safe haven,” said the report, written by analyst Carsten Fritsch.

Commerzbank pointed out that gold has hit record highs in a number of other currencies.

The main impetus has been the world’s response to COVID-19, with lockdowns, social distancing and temporary business closures in much of the world. This led to sharply reduced economic activity, in turn leaving authorities scrambling to try to prop up the economy. Government bonds have fallen sharply.

In the case of the U.S., the Federal Reserve undertook two unscheduled rate cuts that left the federal funds rate at zero percent and initiated an open-ended bond-purchasing program that far exceeds the quantitative easing after the 2008 financial crisis, Commerzbank pointed out. Further, Congress approved a $2 trillion stimulus package. Other countries, including Germany, have taken similar measures.

“The severe impact of the global lockdown on economies and financial markets, the flood of money released by central banks and governments and the ballooning sovereign debt point to ongoing robust demand for gold as a safe haven and last-resort lifeline,” the bank said. “Gold could also derive additional appeal as a protection against inflation after the lockdown is eased if the pent-up demand meets for a time with limited supply of goods and services due to production shutdowns and disrupted supply chains.

“We are therefore upwardly revising our forecast for the gold price at year’s end to $1,800 per troy ounce (from $1,650 previously). This is based on the expectation that the global corona pandemic will be brought under control in the second half of the year and that the situation on the markets settles down accordingly.”

Commerzbank listed some factors that may prevent still-higher prices. For starters, the pandemic is having a “significant braking effect” on physical demand in major gold-consuming nations such as China and India.

“Consumers in China are initially likely to give priority to acquiring other things first,” the bank said. “Gold demand was already weak in India before the government...imposed a nationwide lockdown at the end of March. Even once confinement measures are lifted, demand can hardly be expected to recover in any significant way in view of the record-high local gold prices.”

Further, central-bank gold buying may slow, particularly after the announcement that Russia’s central bank plans to buy no more gold starting this month, taking away “the most important buyer of recent months,” Commerzbank said. Purchases by China’s central bank also have cooled since autumn.

“In some cases, the central banks of emerging economies could also find themselves forced to sell or lend gold in a bid to obtain U.S. dollars and bridge funding problems for their governments.”

Still, Commerzbank said, “there is hardly likely to be any shortage of potential buyers, be they other central banks or retail investors.”

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