The stock market remains on a seemingly endless bull market run since the March lows. With this, investors would typically expect gold to perform poorly. Many traditionally view gold as a “safe haven” asset that sort of muddles along during good times. However, it outperforms in a time of crisis as investors look to protect their wealth.
So it’s been a bit of a surprise to see gold up by 18% this year. It’s also closing in on an all-time high while the stock market has rallied.
But gold’s performance this year has little correlation to how the stock market is performing. Additionally, it has more to do with interest rate policies around the world.
Gold in the Current State of the Economy
Here in the US, economic activity has ground to a halt due to the coronavirus pandemic. Because of this, the Federal Reserve pushed interest rates to near-zero. Other central banks around the world have done the same. Also, a few have turned to negative interest rates in an effort to boost their economies.
When you add in inflation, it means that investors here in the US who own gold aren’t missing out on the trade-off between holding gold – which always offers no yield – and earning a yield from bonds.
“As real yields turn negative, opportunity costs for holding non-yielding assets essentially vanish, particularly when viewed through the historical lens of fiat currencies and their purchasing power. This provides a continued tailwind for gold,” said Jeff deGraaf, chairman of Renaissance Macro Research.
Gold closed as high as $1,820 an ounce last week, its highest price since September 2011.
Georgette Boele, a precious-metal strategist at ABN Amro, agrees with deGraff. She says gold is moving in lock-step with stocks. Boele also mentions that gold is acting more like a “risk-on” asset instead of its usual role of a “risk-off” investment. She says this is due to low interest rates.
She adds “Firstly, central bank policy is a strong driver behind higher gold prices. Not only are official rates close to zero in a large number of countries, they will unlikely go up in our forecast horizon,” and says that all of the money printing by central banks around the globe “sounds like music to the ears of gold bugs as money floods into the market and currencies begin to decline.”
A Very Bullish Signal
Boele says it’s a very bullish signal for gold prices that investors have bought every dip by the precious metal during the rally.
“Now the psychological resistance of $1,800 per ounce has been surpassed. It seems that investors will only be satisfied if the former (intraday) peak in gold prices at $1,921 per ounce is reached and taken out. Above that, the important psychological level of $2,000 per ounce is within reach.” she said.
Boele’s employer, ABN Amro, has raised its year-end gold target from $1,700 an ounce to $1,900 an ounce. ABN Amro also says any dip in gold prices should be bought.
“We still expect a sizeable correction in gold prices in a risk off environment when the dollar is back in favor. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in,” said Boele.