- Hedge funds are betting on gold as a way to maximize returns during the unprecedented monetary and fiscal stimulus.
- But James Richman, CEO and chief investment officer at JJ Richman, said, “Gold has to take a break and go a little lower before we can talk about a steady rise from this point.”
- Analysts note that the fundamentals of gold have not changed and that exuberance may wane.
- Follow the price of gold live here.
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The markets are betting that gold prices will rise as bond rates reach their lowest levels after weeks of monetary and fiscal intervention, but analysts are warning investors to “take a break” from the precious metal.
Elliott Management, Caixin Associates and Dymon Asia Capital are among the funds to bet on gold so far in 2020.
Gold prices have risen 11% since the start of the year, according to data from Markets Insider.
James Richman, CEO and Chief Investment Officer at JJ Richman, told Markets Insider: “Gold has to take a break and go a little lower before we can speak of a steady rise from this point.”
Reflecting enthusiasm for gold, New York-based Paul Singer’s Elliott Management, which manages approximately $ 40 billion in assets, considers it to be one of the most undervalued assets available . In a letter to customers last month, he stated that its fair value was “multiples of its current price”.
But analysts told Markets Insider that the markets are too optimistic about the precious metal and that the outlook remains uncertain.
Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said that gold prices “lifted investors” during the great financial crisis.
“Before and during the financial crisis, from 2007 to 2009, the price of gold dragged investors into a mad rush – up about 30% from mid-2007 to early 2008, to fall around 25 % throughout spring and summer 2008, and finally to regroup and reach record levels later in 2009. “
He added: “Currently, what lies behind the rise in gold is actually the enthusiasm and optimism that surrounds it, not necessarily its intrinsic fundamental drivers.”
Why Gold Isn’t As Promising As It Seems
Many analysts expect the price of gold to increase in the coming months due to the coronavirus pandemic. Bank of America forecast in April that prices could almost double to $ 3,000 by the end of 2020, while UBS said last week that gold could gain 5% more than current levels.
Ma said the annual compounded return on gold over the past 100 years has been around 1.7% pa, which is low given that ETF costs or storage costs are likely to be higher.
Robert R. Johnson, professor of finance at Heider College of Business, Creighton University, said: “Gold and silver are speculative investments, based on the theory of the greatest fool. The price of gold doesn’t is not determined by its intrinsic value, but simply by its expected value. selling price to someone in the future. “
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He quoted comments from famed billionaire investor Warren Buffett that, for $ 9.6 trillion, you could buy all the gold in the world, and it would fit into a nice cube inside a lot of diamond baseball.
“For that much money, you could buy all the cropland in the United States, buy 16 Exxon Mobils and still have about $ 1 trillion worth of walk-around money,” said Johnson, echoing Buffett’s rationale.
Johnson added: “Once the coronavirus pandemic has subsided, investors will likely sell some of their holdings of gold. Although there are” gold bugs “that will hold on to their investments in gold , once the fear subsides, the price of gold will likely drop. ” he added.
Richman said: “At the moment, I will put more money into defensive stocks like GE (General Electric), which will soon show signs of recovery and produce real returns, not just to preserve your assets under current conditions . ”
How Fed Actions Affect Gold Prices
On April 9, the Fed announced a $ 2.3 trillion package to support loans and increase purchases of corporate debt.
Purchasing corporate debt generally reduces relative returns and reduces the opportunity cost of holding gold.
“While the impression of money, as the Federal Reserve does, will often cause a country’s currency to fall, most of the world’s major central banks do the same, so on a relative basis, the US dollar doesn’t ‘is no worse and remains the world’s reserve, “” said Gregory Leo, director of investments and head of global wealth management at IDB Bank.
He added: “Obviously there will be pockets of supply disruptions and demand pressures, but overall we don’t see inflation as a short term problem and therefore we see no reason to rush for gold. “
John La Forge, head of real assets strategy at the Wells Fargo Investment Institute, said: “Gold is a commodity, and commodities work together like family in long super cycles (bullish and bearish).
“Right now, commodities remain in a bearish super-cycle that started in 2011. I think it could still be a few years before commodities enter their new bullish super-cycle.”
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Oil prices have experienced significant upward and downward volatility in the past month. Oil prices in the United States became negative for the first time in history more than a fortnight ago, due to lack of storage space and declining demand for fuel, economic activity who were beaten during the pandemic.
“Until this bear passes to a bull, the rise in gold will be curbed,” added La Forge.
Gold was down 1.4% to 1,683.35 ounces at 1:52 p.m. ET Thursday.