Precious Metals Watch – Gold gains from global stimulus measures

by: Georgette Boele

In this publication: Gold powers to an all-time high across a range of currencies. Against the dollar, gold’s all-time high of USD 1,921 is now within reach. The stars are aligned for gold prices to continue to rise. Aggressive monetary policy easing, ultra-low interest rates, negative US real yields, fiscal stimulus and the technical outlook all support gold prices. Nonetheless, positioning does remain extreme which could encourage volatility. Our new gold price forecast for end 2020 is USD 1,900 per ounce (was USD 1,700 per ounce). Our new gold price forecast for end 2021 is USD 2,000 per ounce (was USD 1,800 per ounce).

200709-Gold-Watch-2.pdf (286 KB)

Introduction – Will gold break records?

We had expected another risk off wave in financial markets to support the US dollar and to result in temporary gold price weakness. Up to now this have not materialised. Gold prices have rallied strongly and have set new all-time high prices versus a number of currencies, although not yet versus the US dollar. However, on 8 July gold prices cleared an important psychological resistance at USD 1,800 per ounce. Will gold prices rally to all-time high of USD 1,921 per ounce, which was set on 6 September 2011?

Stars aligned for gold price rises

On 16 April we wrote that the stars seem to be aligned for gold prices (see the Precious Metals Watch). That has clearly been the case as the world is taken over by government and central bank stimulus measures.

Firstly, central bank policy is a strong driver behind higher gold prices. Not only are official rates close to zero in a large number of countries, they will unlikely go up in our forecast horizon. Moreover, most central banks have announced quantitative easing. The Fed has embarked on unlimited QE and the BoJ and the ECB also have large QE programs. This sounds like music to the ears of gold bugs as money floods into the market and currencies begin to decline.

Secondly, in a number of countries there are negative rates (official and/or government bond rates). Gold is not paying any interest rates. So negative rates are another major support to gold prices especially versus the euro.

Thirdly, the US may not have negative official rates or government bond yields, but nominal rates corrected for inflation expectations (real rates) are in negative territory. As long as there are expectations that the Fed would move to a form of yield curve control, the upside in US Treasury yields is limited. So, if investors are concerned about inflation in the longer run this will be visible in inflation expectations and negative US real yields. As the graph below on the right shows, this has been a major support to gold prices. Our US economist expects relatively stable US Treasury yields and no pick-up in inflation, because of the negative effect of the pandemic on the economy. So, we think that this driver should have less impact going forward.

Fourthly, governments have embarked on large-scale fiscal stimulus to support the economy. As a result, fiscal deficits in a large number of countries have risen substantially, even to double digit numbers. This development has made some investors nervous, especially in combination with the substantial amount of monetary policy stimulus. As a result, investors have bought gold.

Fifthly, and finally, the technical outlook is positive. Investors saw every dip in gold prices as a buying opportunity. Now the psychological resistance of USD 1,800 per ounce has been surpassed. It seems that investors will only be satisfied if the former peak in gold prices at USD 1,921 per ounce is reached and taken out. Above that the important psychological level of USD 2,000 per ounce is within reach.

Bullish outlook but … potential volatility due to positioning

We recognise that the stars are still aligned for gold prices and therefore the momentum is very positive. But we are also concerned about positioning. Speculators temporary reduced positions, but other investors have continued buying. Speculative positions are substantial and positions in ETFs are at an all-time high (see graphs below). If investor sentiment deteriorates, some of these positions will likely be closed. This will cause higher volatility in gold prices. We still expect a sizeable correction in gold prices in a risk off environment when the dollar is back in favour. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in. After such a correction prices could rally again. So, we have adjusted our forecast to reflect this and the technical break of USD 1,800 per ounce. Our forecasts don’t reflect the near-term dip in prices we still expect, because this sell-off will be short-lived. Our new year-end forecast is USD 1,900 per ounce (was 1,700) and new forecast for end of 2021 is USD 2,000 per ounce (was 1,800). We have also upgraded our other precious metal forecasts as higher gold prices also support silver and platinum prices.