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Hold gold as exit from COVID-19 stimulus measures will be messy - CIBC

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(Kitco News) - A global economy that has grounded to a halt because of the global COVID-19 pandemic is raising concerns of a deep deflationary environment, which could be negative for gold; however, one Canadian Bank, said that investors should pay more attention to the inflationary risks, being driven by central bank monetary policy and fiscal spending, as the economy recovers.

In a report Monday, analysts at CIBC said that an inflation storm is brewing in the gold market that will continue to support higher prices. Looking at interest rates, the analysts said that during periods of negative interest rates, gold prices have at least doubled.

“So far, the move has been about 50%,” the analysts said.

The analysts said that investors can ’t underestimate the impact central bank monetary policy will have on financial markets.

“We have never seen governments and central banks as involved in the global economy as they are today,” they said. “While that is clearly needed given the state sanctioned 'stay-at-hom’” directives to deal with the health risks associated with the COVID-19 virus, the disruption arising from public sector involvement and ultimate exit from the corporate world will likely be messy.”

Although economists have focused on the growing deflationary risks caused by weak global demand, curtailed because of the COVID-19 pandemic, the analysts at CIBC said that the global supply-chain destruction could actually end up pushing inflation pressures higher, which will be another positive factor for gold. They added that central banks will be slow to deal with this inflation scenario.

“We expect all central banks to accept an early boost in inflation before responding with higher interest rates, particularly given the years of undershooting inflation targets,” they said.

CIBC added that one significant result of coronavirus is a smaller global supply chain, which could lead to higher prices as companies develop more domestic production and source materials closer to home.

In a world with so many unknown factors lurking in the shadows, the analysts said that it makes sense to hold gold.

“Against this environment, it is certainly possible that everything works out. We find it hard to be clear on much, except the belief there will be more debt, more volatility and a solid environment for gold and other risk-averse assets,” the analysts said.

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.