COMMENT – Is it time to get out of gold?

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Has gold’s rally finally come to an end?

Prices of the precious metal rose to all-time highs in early August, but since then have come off 10% from those levels. Investors are probably weighing whether to remain invested in the commodity.

However, Sprott CEO Peter Gross I old sees the recent pullback as “a healthy correction and a buying opportunity” for investors. He points out that the price of gold is driven by three factors mainly: the US dollar, money supply and real interest rates. “We believe the market conditions for gold are currently favorable, largely driven by the voracious need for flat money supply growth and its increasingly direct correlation with all financial markets.”

Gold prices are currently hovering around $1,880/ounce and has been finding it hard to breach the psychological mark of $1,900/ounce. 

The August high of above $2,000/ounce seem distant in the horizon, though many had expected prices would reach that level by the year-end if US President Biden pushed through an economic stimulus package. But this had not yet materialized.

However Bloomberg Intelligence analyst Michael McGlone believes that the stars are still lined up for gold. “Gold appears too cold nearing the end of 2020, if previous surrounding quantitative easing and debt-to-GDP are a guide,” he says.

McGlone believes that gold enjoys layers of support below $1,800/ounce. He added that US debt-to GDP has crossed a 130% threshold and currently stands at a post-war high. Unless central bank measures to prop up economies suddenly decline, then “it will be hard for gold to do anything but appreciate.”

It’s true that the news about development of covid vaccines have taken a toll on gold lately, but covid infections have now surged to unprecedented levels in parts of Europe such as Germany, analysts highlighted. The situation remains almost equally grim even in the US. 

While the risk on sentiment has proved several stock markets to all-time highs lately, but many observers are worried that a correction might be on the cards. Therefore, it may be too early to take a call on pulling money out of gold and investing in stocks whose values appear stretched.

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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