The price of gold experienced its biggest drop in years on Tuesday, but underlying fundamentals signal more gains ahead.
On Tuesday, gold plunged 4.6% to $1,946–its biggest single-day decline in seven years. Other metals posted similar collapses with silver down 11% and platinum down 4.7% on the day.
Gold’s sharp correction comes after a massive year-to-date precious metals rally amid the coronavirus pandemic. Let’s dig a little bit deeper to find out why exactly gold ran into a roadblock this week.
Coronavirus infection rates are falling dramatically around the world– particularly in hard-hit countries like the United States, which has the highest number of infections and deaths on the planet.
According to data from Worldometers, daily U.S. COVID-19 infections peaked at 78,000 on July 24 before falling sharply to around 50,000 at the time of writing. This decline is happening with no nation-wide lockdown and limited social distancing. If current trends continue, the pandemic may be mostly behind us by the end of the year.
This is bad news for gold because it is a haven asset that thrives on uncertainty in the economy.
While the second wave of coronavirus is still a significant risk going forward, vaccines will blunt its impacts–putting further pressure on gold prices going forward. Several new vaccine candidates are on the horizon.
Leading vaccine developer Moderna has inked a deal with the U.S. government to provide 100 million doses of its experimental coronavirus vaccine as soon as it’s approved. This is enough doses to cover almost a third of all Americans and the entire at-risk population of people over age 45.
The U.S government has also reached deals with Pfizer and Johnson & Johnson for the mass distribution of vaccines.
In Russia, Putin’s government has approved a new vaccine with plans to start mass production in October. Brazil’s Parana state is in talks with Russia to also produce the vaccine, despite its controversial testing record.
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Perhaps the biggest threat to gold prices comes from fiscal policy. Gold investors hoped the government would approve another massive stimulus policy that would increase inflation and crash real bond yields. But that didn’t happen because Congress couldn’t get its act together, and the deal fell through.
Bart Melek, head of commodity strategies at TD securities has this to say about the sharp reversal:
The precious metals complex was driven by a drop in rates, a steady increase in inflation expectations, and a falling U.S. dollar. The rally is now giving up some of these gains as these drivers lose momentum.
While gold is in near-term pain, its long term bull thesis remains intact.
Bank of America predicts gold prices could reach $3,000/oz within 18 months due to low interest rates and a lackluster economy. They also believe the government will have to resort to more stimulus to keep the economy from flatlining later in the year.
Last modified: September 23, 2020 2:19 PM