Chief Market Strategist at FXTM
After
declining 5.4% from the peak reached on May 18, gold is again flirting with the
key resistance level and recent multi-year high of $1,764. The resurgence in
the precious metal price has coincided with a record increase in global
coronavirus cases and as of Friday, the SPDR Gold Trust holding saw a rise in
net inflows of 2%.
While
many investors do not like gold as an asset class given that it pays no
interest, those same investors may find the precious metal a better alternative
to many other asset classes.
The stock market rally is clearly losing steam
and there isn’t much incentive to keep the bull market running much longer.
Equity prices have already discounted the actions taken by central banks across
the globe and another big round of stimulus is not likely at this stage.
Assuming the S&P 500 remains in the range of 3,000 to 3,200 until year end,
it will be trading at a price to earnings multiple of 24 to 26 times for 2020,
and 19 to 20 times for the end of 2021.
That
is considered the most expensive market since the dot com bubble. This isn’t to say that equities are due a
sharp correction, but to continue moving higher they need a fundamental
positive surprise on two fronts, economic and earnings, which is currently far
from the base case scenario.
What
is more important for gold is where fixed income markets are heading next.
Today the US 10-year real yields are trading at -0.61%, and when excluding the
one day drop to -0.98% on March 9, that’s the lowest level for real yields
since 2013, the year when the Federal Reserve delivered a huge shock to
financial markets by revealing their intention to withdraw stimulus.
Real
yields in Europe are even lower than
those in the US, especially in Germany and that is terrible news for
people approaching retirement as it seems they are now assured of a pension
that will fall in value if they don’t take a riskier approach. And with the
trillions of dollars in government and central bank stimulus since the start of
Covid-19, we shouldn’t be surprised
if inflation begins edging higher. That will be another hit for savers.
The
notion that central banks will follow Japan
in targeting yield curves is growing. Keeping short and medium-term yield
maturities under pressure may sound like good news for risk taking, but again
the price will be paid by the elderly as real yields fall further into negative
territory. This should make gold a great hedge against negative yields,
devaluation of currencies, an unexpected surge in inflation or deflation, poor
economic performance and shocks in equity markets.
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