Gold has enough steam left to gravitate to mid-$2,000/oz

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Gold prices remain below a psychological threshold of $2,000/troy ounce as investors are cautiously watching two key events this week — the U.S. Republican national convention where President Donald Trump will accept  his party’s nomination for the November election and the Federal Reserve’s annual Jackson Hole symposium.

While market analysts feel there could be some further pullback after having seen the largest single-day drop in prices since 2013 earlier this month, prices should remain on course to rebounding above the $2,000/ounce level and beyond to mid-$2,000 in the medium to long term.

“We believe gold is well-positioned versus its risk-free counterpart U.S. Treasuries on both a short- and long-term basis. While bonds may be effective cash-parking vehicles for quick-triggered investors, they currently submerge investment portfolios with negative real returns and also expose their owners to plenty of inflation risk,” said Peter Grosskopf, CEO of Sprott Inc.

Massive inequality is fuelling populism globally, which in turn generates election victories for those political parties promising even more “tax and spend,” he added.

A combination of these factors could launch the world into “uncharted monetary territory” at any time, adding that they will be increasing recommendation for gold sector allocations in the current environment.

“We believe the gold price has gravitated back to its historical correlations to the rapid growth of M2 money supply, towering U.S. deficits, and the exploding size of the Federal Reserve balance sheet (which can henceforth serve as a rough proxy for USD currency that has been printed by Modern Monetary Magic),” Grosskopf said.

“Gold prices should gravitate into the mid-$2,000s based on these factors and the announced roster of monetary and fiscal programmes.”

Another analyst said that the support for gold to climb higher remains unchanged, despite fluctuations in stock price movement amid the ongoing pandemic.

A win-win situation

“Gold should continue to advance in most equity-market scenarios, in our view, as the rising stock tide is increasing diversification demand and declining equity prices would encourage more quantitative easing, the primary force supporting the metal,” said Mike McGlone, commodity strategist at Bloomberg Intelligence.

In 2020, gold exchange traded funds are on pace to absorb almost 30% of mine supply, adding an important push factor for the metal. The previous inflow record was in 2009, which absorbed around 24% of the mine production of the previous year.

Gold is in a potential win-win situation with a rising or declining stock market, in our view, said McGlone.

“Our take is that rising stock-market wealth is boosting diversification demand and , if equities keep to the upward trajectory, they will continue buoying the price of the benchmark diversified and store of value,” he added.

“If equities decline, more quantitative easing is likely, which is the top support factor for gold prices.”

Closer home, support factors for gold are stacking up.

Traditionally, India has been a key consumer of mainly jewelry. While consumer demand has remained muted in the last 3-4 months amid a covid-induced lockdown, investment demand for bullion bars and coins have been rising amid the rally in the metal.

With seasonal monsoon rains on track so far to be one of the best in recent years, a rise in summer crop income is expected to lift farm incomes.

That in turn is likely to glow up total jewellery demand during the ongoing festival season period, though high prices may reduce the amount of gold an individual buys. 

Overall, its all stacking up to a better future for gold, though the caveat is that investors should not misread the positive signals to expect another quantum jump in prices so soon after its year-long rally. It will probably be only a gradual upward climb from this point onwards.

Biman Mukherji is a columnist and consulting editor at Indoasiancommodities.com. He has worked for international news organisations such as Reuters, The Wall Street Journal as well as for newspapers like The Times of India. He can be reached at biman.mukherji@indoasiancommodities.in

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