As the record bull market stretches on, and the Coronavirus outbreak incites fears of a potential slowdown in global growth, gold could be a way for any investor to hedge risks to the downside?
While struggling banks provide us with an example for a way a derivative virus can kill a bank, we are now seeing it kill off bullion banks in real-time. With a rising gold price out of the control which would normally be imposed by expandable derivatives, has adequately gone bid only in any size. We are told that this is a direct result of the Coronavirus shutting mines and refineries and disrupting supplies globally, and therefore it should only be short-lived. The London Bullion Market and CME group which runs Comex are issuing calming statements and even advised of the introduction of a new 400-ounce gold derivative agreement with the aim to ease the availability shortage.
The gold derivatives market is perhaps the most important exchange after the US/EUR market. But it’s also the foremost fundamental of all monetary exchange markets. The connection was famously captured in John Exter’s inverse pyramid, which showed how the world’s credit obligations were all supported on a diminishingly small apex of gold.
In short, the gold derivative establishment is panicking.
In light of this let’s see what some of the experts are saying about the future of gold and its pricing.
Goldman Sachs:
Goldman Sachs said, “Now is the time to buy gold, the safe-haven asset, amid market panic over the impact of the growing coronavirus pandemic.
The commodity, which is considered “the currency of last resort,” has slumped lately as investors sell the safe asset for dollars, according to a Monday note from analysts led by Jeffrey Currie.
But Monday’s unexpected action from the Federal Reserve represents a turning point for the asset, as it “reverses these funding stresses and offsets the negative impact to (emerging market) wealth,” the note said. Goldman Sachs recommends investing in gold at its currently decreased price.
“We are beginning to see a similar pattern emerge as gold prices stabilized over the past week and rallied today as the Fed introduced new liquidity injection facilities with this morning’s announcement,” Currie wrote Monday.
“We are likely at an inflection point where ‘Fear’-driven purchases will begin to dominate liquidity-driven selling pressure as it did in November 2008,” Currie wrote.
He continued: “As such, both the near-term and long-term gold outlook are looking far more constructive, and we are increasingly confident in our 12-month target of $1800/toz.”
Citibank:
Citibank said last Wednesday, “The firm believes market jitters will prompt investors to pile into the so-called safe-haven asset, pushing gold prices to $2,000 per ounce in the next 12 to 24 months.”
“Gold should perform as a convex macro asset market hedge, resilient during ongoing risk market rallies but a better hedge during sell-offs and volatile spikes,” the analysts led by Aakash Doshi said.
On Tuesday, gold settled above the $1,600 mark for the first time since April 2013, as investors reacted to Apple’s announcement that it would miss quarterly revenue forecasts thanks to the constrained worldwide supply of iPhones, as well as lower Chinese demand stemming from the virus outbreak.
Shorter-term, Citi raised its 6-to-12 month target for gold to $1,700 per ounce.
Doshi said that the bullish activity in gold this year indicates growing investor concern over where we are in the business cycle, as well as ongoing uncertainties surrounding the U.S.-China trade war and the upcoming U.S. election.
He said that the economic backdrop is also supportive for gold since it tends to do well in a low-interest-rate environment as investors look for yield.
Deutsche bank:
Deutsche Bank’s commodity team is sticking with its view that gold should be worth 1,700 USD an ounce.
Analysts Michael Hsueh and Grant Sporre argue that the balance sheets of the main four central banks (the US, China, Japan, Eurozone) have expanded by 300% since the beginning of 2005.
But are US rates what they used to be for the metal?
This may matter more than US rates.
“If we were to assume that the value of gold should appreciate keeping the overall value of the big four aggregate balance sheet equivalent to that of the value of the above-ground gold stocks, then it should be trading closer to $1,700 an ounce,” the analysts write.
All up, there is some comfort for gold bugs here.
“Our conclusion, however, is that as long as the central banks’ balance sheets continue to expand, the gold price should maintain some momentum,” the Deutsche analysts write.
Even if the Fed does raise interest rates once, other central banks are nowhere near doing do.
FVP Holdings:
FVP Holdings said earlier this week that “With the current market trends we believe that now is a good time to invest in gold.”
Tim Booth CEO of FVP holdings went on to say “We’re seeing the global markets being hit hard by the Coronavirus pandemic and its resulting countrywide lockdowns.”
“So with oil prices at an all-time low, Cryptocurrencies still not in favor by the masses and major currency markets violently fluctuating on every news update about the pandemic or government care package announcement, we believe that gold will be the investor’s safe-haven asset for the foreseeable future.”
He continued by saying “We are confident that with the current trends we’ll see gold get over 1800 USD per OZ and if not higher.”
In Conclusion:
Today’s investors have more choices than at other the other time in history. However, far too many have learned the hard way that diversifying their portfolios with only more paper assets provides no security against adverse financial conditions.
The value of physical gold, on the opposite hand, isn’t tied to any government or corporation and thus doesn’t bear the danger of devaluation related to paper assets. Instead, gold’s value is decided by the global supply and demand of gold that currently exists above ground. That, alongside international agreements, has created a really stable supply. If demand were to stay constant, then the price of gold would remain stable. On the flip side the price of gold would rise if the supply decreased and the demand stays the same.
However, global demand is continuing to increase year on year with the emergence of powerful new economies. And, due to gold’s stabilizing effect, investors are converting more and more soft assets into gold. Thanks to recent sharp increases, gold investment now accounts for a large amount of total demand. When the growth in demand exceeds the growth in supply, the price of gold will increase respectively.
Having said this we are also seeing a significant and growing consensus among analysts, traders, investors, independent researchers and asset allocation experts that gold is a hedging instrument and a safe haven asset.
Therefore, many financial professionals, now believe that gold should form part of investment and savings portfolios for reasons of diversification and financial insurance.
