Gold Monthly Outlook

November 12, 2020

Gold moved back and forth around $1900 levels for most of October before settling around $1880/ounce, 1.4% lower for the month. It was mainly reacting to the movements of the US dollar and US Treasury yields, caused by developments on the next round of fiscal stimulus in the United States and market anxiety leading up to the most important US presidential elections in recent history.

Covid-19 refuses to back down
October was gloomy as far as Covid -19 is concerned. US coronavirus cases have hit a record daily high as states struggle with a new wave of infections. Cases are rising in Europe too, where the UK, Italy, France and Germany have imposed new restrictions and lockdowns. Along with the setback of big drug companies pausing vaccine trials, the number of reinfection cases worldwide too has gone up. Current evidence shows that those who were reinfected suffered a more severe illness the second time. This could result in further slowing down the pace of economic recovery.

It’s becoming clear that normal life will continue to evade us and the world will be stuck in a cycle of lockdowns and openings till a successful Covid-19 vaccine is developed and distributed and the virus is defeated. Most vaccines, in the final stages of clinical trials, are expected to be publicly available only by mid-2021.

Easy money policy to continue
We are already aware of how bad the economic effects of such lockdowns will be, with the global economy having fallen into a deep recession due to the Great Lockdown of 2020. It took 12 trillion dollars of fiscal stimulus and massive monetary easing by central banks to soften the economic effect of the lockdown. And in spite of that businesses have shut down and millions have lost their jobs. The IMF has now projected that the global economy will contract by 4.4% in 2020, but has warned that the climb will be long, uneven, uncertain and prone to setbacks. The second wave of the disease is expected to increase the financial fragility.

As such, government relief measures and lower interest rates and quantitative easing by central banks are a must to get the economy through this health cum economic crisis for as long as it takes. With rates at zero and expansion of the monetary base without real lending, monetary policy becomes passive and can only work towards creating asset bubbles. Several Federal Reserve officials have called for more fiscal response as they realize that their tools have run low. Further fiscal policy response means huge amounts of money trickling down the real economy in the hands of people who would spend it, resulting in inflation. High inflation and low rates would lead to real interest rates moving further down driving savers in search of assets that help preserve purchasing power.

Gold will continue to be a stable form of money with potential to store value in the middle of this global currency devaluation and will move up in these times of low interest rates. It will thus continue to be a preferred portfolio asset generating good risk adjusted returns for its holders for the near future.

Signs of social unrest
To add to the world’s woes, anti-lockdown protests have started in some parts of Europe as people struggle with lost jobs and incomes and economic inequalities rise. This could just be the start of economic pain of the pandemic translating into social unrest. If such social tensions become more common, investors will choose to park their funds in gold.

Gold ETFs add 1000 tons in 2020
Gold moved up sharply by ~20% between April and July, reaching an all-time high in early August. When prices increase at such a fast pace, there is often a period of correction, like the one we are currently in. The metal’s prices have declined by ~8% over the last couple of months. But this pullback is likely short-term in nature. Because despite the weaker prices, investment demand via gold ETFs has continued to increase.

As per the World Gold Council, global net inflows of 1,003 tons in 2020 have taken gold ETF AUM to an all-time high of 3,880 tons or US$ 235 billion. This tells us that even though gold’s popularity seems to have temporarily gone down, its long-term value is intact. And it should be.

Outlook for gold remains positive
Nothing has changed about the economic drivers that have pushed gold to all-time highs.

The Covid-19 pandemic is far from over, we are in the middle of a deep global recession, central banks are injecting liquidity and purchasing assets, interest rates globally continue to stay low, government debts are going up, there is a threat of inflation, the dollar and other currencies continue to be devalued and geo-political tensions exist. As such, gold investors would do well to have a long-term view and ignore the short-term movements in prices.

Next week’s US Presidential elections and the fresh lockdowns across Europe have been impacting on risk sentiment and causing stock market volatility. This in turn has strengthened the dollar off late. It has also pushed benchmark 10-year US Treasury yields to 4-month highs of 0.87%, a sharp increase from 0.65% levels that it has been at for months. Gold, which is priced in dollars tends to weaken when the currency strengthens. Rising yields increase the opportunity cost of holding gold, thus hurting the metal.

But there’s no question that more stimulus is on the way for Americans no matter who wins the election. Thus, a long-term dollar strengthening trend seems unlikely. This is considering the large US fiscal deficit and its debasing effect on the dollar. In addition, more stimulus and spending will translate into higher inflation. Especially since the Federal Reserve has said that it will allow inflation to run higher before tightening monetary policy. This will mean negative real yields for longer. Gold will benefit from both these trends. Also, if the uncertainty increases on further COVID-19 scare or from a contested election in the US, gold will soon start attracting money despite any dollar strength.

If you haven't already allocated 10% to 15% of your investment portfolio to gold yet, this Dhanteras could be a good time. Since purity is a concern when buying physical gold and since the purchase of gold bars and coins comes at a premium on account of markups and making charges, we suggest that investors choose the more price efficient and pure Gold ETF route for investing.

If you have completed your allocation, just sit tight and watch gold play a risk-reducing, return-enhancing role for your portfolio.

Source: Bloomberg, World Gold Council

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