Short-Term Headwinds Hold Back Gold
ValueWalk | Apr 15, 2020 12:15PM ET
Gold prices saw technical selling pressure today following strong gains on Tuesday, a fourth consecutive session of gains. Despite the pressure, the yellow metal remained above the key $1,700 an ounce level after approaching $1,750 on Tuesday.
The run in gold prices has been driven by central bank liquidity injections aimed at reducing the impact of the coronavirus on the global economy. Gold has also been serving as a safe-haven asset and lifeline of last resort amid the pandemic. Commerzbank (DE:CBKG) analysts said in a note this week that they expect the gold price to reach $1,800 an ounce by the end of the year.
They also noted that the U.S. dollar remains strong, which normally weighs on gold prices. However, investors are seeking safe-haven investments in both gold and the dollar amid significant uncertainty about the COVID-19 crisis.
Scotiabank strategist Nicky Shiels said in a note this week that a deflationary demand crisis, supply chain crisis, labor market crisis and energy price crisis are all driving the markets right now. Shiels also noted that monetary and fiscal stimulus have started earlier and ramped up faster than at any other time in history.
She believes gold has found its post-crisis floor and pointed to continuing wide dislocations between paper and physical gold prices following some sizable margin-related selling. Shiels also believes the trajectory for gold prices is more bullish now than it was during the 2009 to 2012 cycle.
She noted that the macroeconomic backdrop of lower and slower growth and unprecedented stimulus have never been better for the yellow metal. She said investors’ share of gold in their portfolios is overweight on an ounce basis but underweight as a percentage of equity portfolio.
However, she added that short-term headwinds like liquidity weak demand for physical gold in Asia and inactive bullish activity among central banks will keep a ceiling on gold prices. She said that for now, gold is trading at a “fear premium of $120."
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