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'$1,900 is certainly in sight': Overvalued equities are buoying gold price – StoneX

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(Kitco News) Bullish trend in precious metals is pushing gold prices closer and closer to the $1,900 an ounce level with the yellow metal ready to climb towards its all-time highs in Q3, StoneX said in its quarterly outlook. 

Gold prices used Q2 to build a solid foundation and are now ready to make further gains, according to StoneX analyst Rhona O’Connell.

“After the febrile markets of the first quarter, conditions have been much calmer in the second quarter and gold has built a steady and gradual bull run and laying the foundations for further gains. As we enter July, the 2012 high has been taken out and provided the final impetus for a clearance of $1,800; $1,900 is certainly in sight before the end of the year, if not higher,” O’Connell wrote. 

At the time of writing, August Comex gold futures were trading near nine-year highs at $1,867.70, up 1.29% on the day.

The price gains in Q2 were led by the western investment sector, which will remain the primary supportive driver for the rest of the year. 

“Both professional and retail [sectors] have been very active … Continued uncertainty over the world’s health and the outlook for economic activity and financial risk, coupled with rising geopolitical tensions saw ETF investment in the first half-year of 734t, split as to 458t in North America, 238t in Europe and 38t elsewhere,” said O’Connell. 

Gold is “in the perfect storm” and even though the second coronavirus wave has been already priced in, the economic fallout has not been, O’Connell pointed out. 

Another major driver for gold has been its role as a hedge against overvalued equities as the Federal Reserve and the European Central Bank balance sheets expanded to $14.03 trillion and flowed into equities, the analyst added.

“Equities are arguably overvalued and this is also buoying gold prices as a hedge against stock market weakness, either short-term spikes or longer-term malaise,” she stated. 

And unless there is a readily-available vaccine or a U-shaped recovery, which is unlikely for the time being, gold will continue to see substantial gains.

Eventually, gold prices will step back after the rally is over, repeating their trading pattern from nearly ten years ago, when gold hit its all-time highs in 2011 and then began its decline in 2013. 

However, if Asian demand for gold picks up by that time, price falls will be contained, O’Connell said. 

“Normally [Asian nations] get used to higher prices within weeks, but this time economic uncertainty prevented this and then COVID-19 took hold,” O’Connell  said. “From 2000-2018 inclusive these countries accounted for 74% of investment-grade gold retail pieces. When they do return to the market then this will be an added element of price support … It would help to contain any price falls, however.” 

Asian demand for gold bars, coins and jewelry has been on the decline since last year’s price advance from $1,300 to $1,500 an ounce, the report explained. 

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