Gold closed at its highest price since late 2012 last week, even as US equities began a move upwards following Thursday’s announcement by the Federal Reserve of an additional $2.3 trillion in support to the economy and markets, with the precious metal’s June futures growing 4.1 percent, while spot gold ticked up 2.2 percent.
Prices are thought to have been elevated further by COVID-19 shipping restrictions on actual physical gold, with investors and bankers reporting “severe shortages” of bullion and coins.
Peter Cooper, market analyst and TheNational.ae contributor, wagers that it’s still “not too early to buy shares in the precious metals producers,” even if the current market rally, the biggest in decades, “turns out to be a mammoth dead cat bounce.”
As evidence, Cooper points to market behaviour during the 2008-2011 recession and market crisis.
“If you look back at the financial crisis, gold prices zoomed higher from mid-October 2008 after the US Federal Reserve acted to stimulate the country’s economy with its so-called $700 billion ‘big bazooka’. Global stock markets also rebounded in a fashion similar to the rally last week. But stock indexes then crashed again until finally bottoming out in March 2009, more than 50 percent of their all-time highs. Gold prices, on the contrary, did not plunge again after the initial 2008 sell-off, and carried on up and up to a new all-time high in 2011,” the analyst writes.
The same pattern can be expected this time around, Cooper believes, pointing to massive stimulus packages introduced by countries worldwide, meaning more and more paper money and, subsequently, inflation. Gold, meanwhile, can’t be artificially inflated in this way, with its production limited by physical factors.
It’s not a 100 percent win-win outlook in the gold market, the analyst warns, pointing to a decline in Chinese consumer demand for the precious metal, and to a move by Russia’s central bank to halt gold purchases during the economic crisis, potentially limited global central bank-fuelled growth in demand.
Nevertheless, Cooper expects tightening supply and a market shift toward gold and other precious metals “as protection against the expected depreciation of currencies and inflationary impact of budget deficits – on a scale not previously seen outside of wartime,” which he says will “more than compensate” for other market factors.
