We are watching history unfold
(Kitco News) - It has been an exciting week for gold investors. After hitting all-time highs nine years ago the gold market has broken its chains and is now soaring in blue sky territory. Not only has gold pushed to new all-time highs but it is testing resistance around $2,000 an ounce.
The rally this past month has been incredible; the gold market is up more than 10%, its best monthly gain in eight years.
Although the gold market is looking a little overheated analysts have noted that there are strong fundamental reasons why gold is now making its historic move. Investors should expect to see significant volatility as gold trades in uncharted territory but analysts have said that everyone needs to keep an eye on the long-term picture.
The reality is that in the current environment, where real U.S. 10-year yields are -1%, gold is the last bastion of safety for many investors.
But that is only part of the story. Earlier this week, Goldman Sachs said that inflation is only part of gold’s story. A major factor, they highlighted was the risk of currency debasement. Central banks around the world, led by the Federal Reserve, are pumping massive amounts of liquidity to stabilize financial markets and the global economy devastated by the COVID-19 pandemic. The bank expects that this trend will continue for the foreseeable future and the U.S. dollar’s reserve status could be at risk.
“Ironically, the greater the deflationary concerns that policymakers must fight today, the greater the debt build up and the higher the inflationary risks are in the future,” the analysts said. “The key is that the current debasement and debt accumulation sows the seeds for future inflationary risks despite inflationary risks remaining low today”
Mike McGlone, senior commodity analyst at Bloomberg Intelligence, had an interesting viewpoint on the current market. He said that although the market is overheating a little bit, it is nowhere near overvalued.
He added that a bear market in equities could be what ignites gold’s next move higher.
"The S&P 500 is almost up 200%, 300% over the last ten years. It just can't continue to do that. Not without strong, solid economic growth earnings," he said. "Yes, we're getting a bid from monetary, fiscal stimulus, but that is dicey and that's not going to last."
With investors paying attention to low interest rates and weakening currencies, it is clear that investment demand is what’s driving the latest rally in gold. The World Gold Council highlighted the dichotomy between investment demand and all other sectors in the market.
In its latest quarter trends report, the WGC said that physical demand actually fell 11% in the second quarter even as investment demand for exchange-traded products hit record levels.
“The COVID-19 pandemic was again the main influence on the gold market in Q2, severely curtailing consumer demand while providing support for investment. The global response to the pandemic by central banks and governments, in the form of rate cuts and massive liquidity injections, fueled record flows of 734t into gold-backed ETFs,” the analysts said in the report.
So it has been an exciting week for gold investors and we will have to wait and see if this momentum continues.
Just a quick note for all our readers, we won’t be publishing a newsletter for the next two weeks as I will be on vacation.
Have a great weekend and see you in August!