The economic unease caused by the COVID-19 situation has prompted many investors to consider moving their assets into gold. But with the masses all thinking the same thing, what’s the market outlook for the yellow metal?
To be sure, the recent volatility has us all searching for answers. As the global coronavirus pandemic has played out, virtually no asset class has escaped unscathed by the economic fallout. Stocks and indices have made something of a recovery from their mid-March cliff-dive.
Nevertheless, despite the world’s governments pumping cash into the economy, the outlook for major indices such as the S&P 500 could be grim, according to some analysts.
Amid Market Uncertainty, Could the Price of Gold Peak?
During that fateful mid-March week, gold prices also took a beating as investors fled to liquidate all assets. The price of one troy ounce of gold fell from a high of above $1670 on March 9 to below $1470 nine days later.
Predictably, prices were quick to recover. After all, when the stock market falls, gold tends to fulfill its role as a safe-haven asset. So far, the situation in April and May has been no different.
Except, there’s plenty of evidence that this time is different, and gold could even outperform its previous rallies during market uncertainty. Consider that during previous major stock market crashes, such as the 2008 financial crisis or Black Monday in 1987, there were no other externalities affecting the price of gold, which was purely driven by supply and demand.
This time around, the coronavirus is causing interruption on an unprecedented scale, including the supply of physical gold. Three of Europe’s biggest gold refineries are based in the Swiss canton of Ticino. On March 24, cantonal authorities ordered all three refineries to close. Although they’ve been allowed to reopen since April 5, they’re still only operating at around 50% of their normal capacity, meaning there’s a squeeze on the supply of physical gold.
Furthermore, as many flights have been grounded across the globe, gold dealers have been struggling to get their hands on the bullion needed to meet demand.
This perfect storm of a strangled supply and soaring demand has led some analysts to speculate that gold prices could reach an all-time high in 2020 – over $1920, which is the current high reached in August 2011. If you’d bought gold back in 2018 when it was trading around $1200, that represents returns of 50%. Even at the current prices, the all-time high would provide a return of over 12%. In a market where everything else is falling, those numbers appear to be pretty tempting.
However, all this is pure speculation. Perhaps the strongest signal yet that gold could be about to skyrocket comes from Bank of America, which recently raised its 18-month gold price target to $3,000 per ounce, an increase of 50% above its previous target of $2,000. BoA analysts predict that fiat currencies are likely to come under pressure from economic contraction and government borrowing, pushing the price of gold to a new record high.
So, if you’re looking to get into the gold markets at this point, what are your options?
Many investors have already turned to futures amid a dwindling supply of bullion. So much so, in fact, that the Financial Times reports that gold futures prices were trading at a $70 premium above physical gold late last month. The disparity eased somewhat after the CME started issuing a new contract with flexible delivery dates, allowing time for the current squeeze on physical supply to ease.
For the average Joe investor, futures can be a risky business, particularly if you’re trading on leverage.
Options can be a safer bet, as if the price doesn’t go in the direction you hoped, you’ll only be down the value of the initial premium.
However, many retail investors prefer more passive investments, for which an ETF is the best choice. If you go this route, just make sure you choose your product carefully. Some ETFs are designed to track the price of gold itself. In contrast, others involve investing in the stocks of gold producing companies, or a mix of both. While soaring gold prices are good news for the entire industry, do your research to check what kind of assets an ETF is tracking.
Gold producing companies are seeing external market forces at play beyond the pure supply and demand on the yellow metal. For example, a large proportion of the operating costs for gold miners is energy, typically diesel fuel. The recent precipitous drops in oil price, therefore, could spell great news for investors in stock of gold producers, if the falling price translates into increased profits.
Furthermore, those companies that can continue operating uninterrupted during these unprecedented times will be able to enjoy the revenue boost from increased demand for gold. Therefore, gold stocks are another asset worth keeping an eye on during these turbulent times.
In All Likelihood, Worth the Rush
The coronavirus crisis, and its various economic ripples, has many of us unsure of what to do.
However, it’s worth bearing in mind that historically, in times of disquiet in the markets, gold has been a relatively safe bet. Whether you’re keen to invest in gold shares, stocks, derivatives or bullion, the most important thing is to do your research.
Jim Hoffer is founder and managing director at Hoffer Financial Consulting.
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