Investing in gold is like shorting humanity, according to one Wall Street analyst. How long until the gold bugs get crushed?
If anyone is benefiting from the coronavirus pandemic, it’s gold investors. Gold prices have soared over the last several months, with the metal up 13.74% year-to-date compared with a 12% decline in the S&P 500. Some analysts believe the price could hit $3,000 in as little as 18 months.
Gold prices are rising because investors see the metal as a safe haven against global uncertainty and a hedge against inflation — especially with the Federal Reserve undertaking unprecedented levels of stimulus to combat the coronavirus pandemic.
But several factors could send prices crashing back down to earth. Here is a list of three things that could crash gold in 2020:
By betting on gold, investors are essentially shorting the human race. That’s because the metal benefits from the ongoing human and economic turmoil unleashed by the coronavirus pandemic. According to Edward Moya, a senior analyst at brokerage firm OANDA, progress in developing a coronavirus vaccine will probably derail gold’s rally.
And thankfully, a vaccine looks closer than ever.
According to the BBC, 80 groups around the world are currently researching a coronavirus vaccine with several already in clinical trials. Vaccine development usually takes years, but researchers hope to fast-track the process to months by skipping animal tests and other steps.
Most experts believe a vaccine will be available by mid-2021 which could mark the expiration date of the precious metal’s current rally.
But a vaccine isn’t the only thing threatening gold prices. Several companies, including Gilead, are working on potential treatments for people who are already infected. If any of these therapies show promise, gold bugs could be in a world of well-deserved pain. Which side are they on, anyway?
While gold seems to be loosely correlated with the equity market, the metal can benefit from economic turmoil. That’s because when the economy is in bad shape, the Federal Reserve and the Federal government both step in to buy up assets, provide liquidity to the market, and spend outrageous amounts of money.
Recent examples of this include the White House’s $2 trillion economic stimulus package and the Federal Reserves’ multi-trillion-dollar economic intervention.
In a report titled “The Fed Can’t Print Gold,” Bank of America analyst Micheal Widmer argues that soaring central bank balance sheets and fiscal stimulus could put fiat currency under pressure, boosting demand for gold as a hedge against inflation. But if the economy recovers in the near-term, the Fed will reduce its balance sheet, stopping the gold rally in its tracks.
Several countries are already exploring plans to end coronavirus lockdowns and reopen their economies. If the global economy manages to pull off a quick V-shaped recovery, this could reduce the need for fiscal stimulus and kill the gold rally.
Gold tends to move in the opposite direction of real yields — which are bond yields adjusted for inflation. This means the metal’s price goes up when there is inflation in the economy and it goes down when there is deflation in the economy. With U.S oil prices recently falling below zero, there is a big possibility that America could be facing consumer price deflation. And this would be terrible for gold.
According to the Wall Street Journal, demand for Treasury Inflation-Protected Securities (TIPS) is “surging”. When demand for these assets increases, it means more investors expect deflation in the economy. If these investors are right, gold prices could be crashing soon.
Gold is a hedge against inflation because it holds its value when the dollar loses value. But when the dollar is gaining value, gold looks much less attractive. While the dollar is currently flat, several factors could push it upwards. These include a flight to safety out of devaluing currencies in Latin America, Africa, and the Middle East. With oil prices falling so low, this gold-killing scenario is looking even more likely.
The gold spot price currently stands at $1,744 per ounce, and the SPDR Gold ETF stands at 162. The metal has returned a respectable 35% over the last 12 months, but how long will the rally last?
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The author holds zero interest in gold.
Last modified: September 23, 2020 1:53 PM