Gold just had a big month, but there are three macro threats on the horizon that could take the shine out of the precious yellow metal.
The gold price surged in April, posting its best month since August 2019. Unprecedented central bank and fiscal stimulus unleashed a flood of demand for the precious metal.
At one point on April 30, gold catapulted as high as $1,720 after starting the month at $1,580 for an ounce. That put the yellow metal on track for its best month since 2016, but it slid to $1,687 by month’s end in a volatile sell-off.
Still, the 6.3% gain for the month was a strong finish to April.
But 2020 still may not be gold’s year to shine. Edward Meir, an analyst at ED&F Man Capital Markets, warned Thursday:
There’s some long liquidation after possibly some disappointment that it wasn’t moving higher… If we get below the key support level- $1,662, it can drop much more. Concerns about the virus seem to be receding a little bit as more countries are opening up and loosening restrictions.
Here are three reasons why gold could crash this year.
Even amid the coronavirus panic, foreign and central bank demand for gold collapsed in the first quarter through April. That’s a bearish signal for the precious metal.
In recent years, foreign central banks have been hoarding gold. Russia and China were chief among them, but others like Germany, Poland, and Hungary bought massive amounts of gold in 2019.
Last August, gold prices rose even faster than in April because of unprecedented central bank demand in the first half of the year:
Central banks purchased a record $15.7bn of gold in the first six months of the year in an effort to diversify their reserves away from the US dollar as global trade tensions continue to simmer.
But the buying spree has come to an end. Russia’s central bank halted all purchases of gold in April. Purchasing gold near a seven-year high makes no sense to them.
This could crash the spot price in short order:
The official sector owns about a fifth of the gold that was ever mined, and was the biggest buyer last year after jewelry consumers. The last time it turned a net seller, in the 1990s and early 2000s, gold prices cratered. Should history repeat itself, the current spike in the market would quickly wilt.
Meanwhile, China’s voracious demand for investment gold cratered 48% year-over-year in the first quarter from 71.2 tons in 2019 to 37.1 tons in 2020. Chinese demand for gold jewelry fell a further 65% – from 183.6 tons last year to 64 tons this year.
Gold is a traditional inflation hedge because central banks can’t produce it like they can dollars or euros. But we learned something confounding after the 2008 financial crisis.
In a recent Brookings Institution interview, Fed Chair Jerome Powell said:
Inflation has been an interesting phenomenon… 12 years ago when the financial crisis was getting going and the Fed was doing quantitive easing, many people feared that the money supply as a result of quantitative easing, asset purchases– would result in high inflation. Not only did it not happen, the challenge has become that inflation has been below our target.
Indeed, before anyone knew the coronavirus pandemic and global economic crash were coming, Jerome Powell and others at the Fed grappled with the danger of deflation.
Yet the U.S. Dollar Index, a measure of the dollar’s strength relative to foreign currencies, has increased since the $6 trillion stimulus effort by Congress and the Fed commenced in late March. Even the unprecedented measures may not cause inflation.
If inflation fears don’t materialize, it could send gold crashing.
Gold and oil tend to have an inverse price correlation. Part of the reason for gold’s sell-off late Thursday was sharply higher crude oil prices since Tuesday.
While oil faces a global demand collapse in this severe economic downturn, the commodity crashed so precipitously last month because of a supply glut with a Saudi-Russian price war to thank for it. But we may see supplies whittled down after the two OPEC giants agreed to slash production last month.
The Trump Administration leaned heavily on the Saudis to cut it out, threatening to pull military support in the region unless the Gulf kingdom put the brakes on production.
If the price of a barrel increases – or even remains stable – it could take some of the shine out of gold.