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Gold price has upside in Q2 as 'tremendous amount of liquidity is looking for a home' - StoneX

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(Kitco News) Everything considered, there is an upside risk to gold price for the second quarter, according to StoneX, which cites an enormous amount of liquidity still looking for a home.

"Gold still has upside potential. The economic recovery is heavily contingent upon government stimulus and the cushion that it puts under the financial sector and the outlook is still uncertain," Rhona O'Connell, head of market analysis for EMEA and Asia regions at StoneX.

One of the main arguments for gold is that it is a hedge against risk. And with so much liquidity out there looking for a home, the precious metal is still viewed as a needed asset at this stage of the economic recovery, O'Connell wrote in the Q2 outlook.

"There is a tremendous amount of liquidity still looking for a home (the IMF estimates that $12Tn were added to central banks' balance sheets globally last year) and gold's role as a risk hedge is still valid," she said.

The biggest risk to the global economic recovery is the new COVID-19 outbreaks. "Recovery in 2021 will depend on the progress of immunization rates, on current stimuli, and on pre-pandemic dynamics. The euphoria for a return to normal, leading to careless relaxation of social distance measures and the emergence of new disease outbreaks, is one of the main risks for this scenario," O'Connell noted.

How the world recovers from here is still an unknown as the virus continues to mutate, and European economies are still a few months behind North America.

Bullish factors for gold in the second quarter include negative real and nominal interest rates, longer-term inflationary fears, massive liquidity from stimuli, and rising geopolitical tensions.

The bearish drivers are improved vaccination rollout around the world and more risk-on sentiment.

"Historically, increased fears over inflation have largely (but not always) been favorable to gold. This time, though, the growth in confidence at the consumer level and the expectations of a benign outcome from the vaccination programs have combined to focus investor attention on economic growth prospects; this has boosted longer-term bond yields," O'Connell explained.

Rotation into risk-on assets has hurt gold at the beginning of this year. In the second quarter, gold is seeing support come from the physical side of the market.

"As confidence grows in the western hemisphere, so by association the appetite for gold at the individual level in the Gulf, south and south-east Asia is growing. Buying has picked up smartly since mid-quarter. Given that turnover in the Over the Counter market was 137 times mine production last year (227 times if derivatives are included) then it is clear that the 'hot' money will determine trends but physical flows are also important in determining tightness and local premia, and can cushion price falls," O'Connell said.

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