With the new daily cycle driven by coronavirus numbers and the stock market recovery, little attention has been paid to gold as it continues to climb higher and approaches the all-time high of $1924 per ounce set in 2011.
What has caught many investors off-guard is the unusual correlation between the price of gold and the stock market. Typically, gold will climb during times of uncertainty, like when the stock market is falling, and moves lower when the market advances.
But both gold and stocks are moving higher, and Chris Weston, head of research at Pepperstone, says the reason is both are being pushed higher by falling bond yields.
He points out that the market views gold as a zero-coupon bond, so as inflation-adjusted Treasury yields head lower, gold may climb and becomes more attractive.
Weston does express concern that if stocks do sell off and the dollar strengthens, gold could take a hit. But he says “Until that time the path of least resistance is higher” and has a price target of $1796 per ounce.
Chris Vermeulen, the founder of Technical Traders, says the reason gold continues to climb higher in tandem with stocks is actually a lack of conviction in the market rally since the March lows.
“What this is telling us is that global investors and traders are very fearful of this rally in the stock market and are actively hedging in Gold and Silver. Traders understand the risks to the credit and banking system and are playing the rally in the stock market cautiously while “loading up” on Gold as a means to protect against unknown risks.”
Vermeulen believes that once gold crosses over $2,000 per ounce, the next price move will be significant.
“Once Gold clears the $2000 price level, we believe Gold will enter a parabolic upside price trend that could accelerate well above $3250 very quickly – possibly before the end of 2020,” said Vermeulen.
In a worst-case scenario where the central banks can’t find a way to generate real economic growth going forward or we see a collapse in the credit markets or banking sector, Vermeulen says the historical precedence for the price of gold is stratospheric.
“Should the credit markets or banking sector collapse or experience any real extended risks, Gold could rally to unbelievable levels (like in 1979~80; where the price of Gold was over $650 per ounce and the price of the SPX was $110). If that were to happen at today’s levels, Gold would reach levels above $22,250 or higher. Think about it.”
A Less Aggressive Price Target
Dan Oliver, founder of Myrmikan Capital, has a slightly less aggressive price target but says every dollar the Fed prints mean a higher price of gold.
“I’m at $10,000 now,” says Oliver, of his price target for an ounce of gold, compared to his previous prediction of $3,000 per ounce.
He says the price of gold comes down to one thing: the Federal Reserve’s balance sheet.
“It’s very easy, you say ‘Okay, what are the Federal Reserve’s assets and what are their liabilities?’ Well their assets include some gold, they say they have 300 tons of gold on their balance sheet… what are their liabilities? The dollar. That’s what their liability is,” says Oliver. “So my point is that when you project a crash in the value of the other assets of the Fed, ie the mortgage bonds that they own, the Treasury bonds that they own, all these new funky commercial debt that they’re buying, some of it sub-investment grade, when those things crash, the Fed will find its assets completely stripped of value… and that will have a direct influence on the dollar.”
“So if you just crunch the numbers, if you say what happens when the market stages a run on the Fed, what does that look like? What it looks like is the price of gold rising to a price that balances the Fed’s balance sheet. And as the Fed increases the balance sheet size, that equilibrium number goes higher and higher and higher.”
Gold loves monetary debasement,” says Oliver, “and that’s where we are and that’s why gold is responding.”