The big question of gold: can the bull market survive a pandemic?
(Bloomberg) – The record-breaking gold bull market faces an existential question after this month’s pharmaceutical breakthroughs: What will happen to the rally once the Covid-19 vaccines start rolling out? Gold is viewed by many as the ultimate safe haven asset, inevitably pushed up in times of turmoil. According to this logic, the beginning of the end of the crisis would mark a turning point for the rally. But the precious metal also serves as a hedge against inflation. And with the huge sums of money pouring into the global economy this year, any sign of rising consumer prices could send investors back to bullion. For most of 2020, conditions could hardly have been better. for gold, as the deluge of money printing, a weak dollar and global uncertainty boosted demand, pushing prices higher. The fall in real US Treasury rates sparked larger gains in July and August, ultimately sending spot gold to a record above $ 2,075 an ounce. – negotiated funds, which at their peak in October had absorbed nearly 900 tonnes of metal this year, more than double the final inflow in 2019. In a few weeks, everything changed. Gold suffered its second plus sharp decline in seven years after the day Pfizer Inc. announced the first results showing that its vaccine was 90% effective. The political wrangling in the United States raises doubts about the future recovery. ETFs, which were so crucial to this year’s rally, posted exits for two consecutive weeks, while bullish hedge fund bullion bets were near their lowest level in 17 months of the week until to November 17. There is a real prospect of a return to normal, maybe by the spring, ”said Tai Wong, head of metal derivatives trading at BMO Capital Markets. While low rates and the potential for greater government support will help bullion rise over time, “the speed of gold’s rise has likely been tempered in the near term,” he said. . So can the bull market stay alive? The issue of inflation will be essential. to any prospect now, and this is not the first time. Gold hit its old record in 2011, just after the financial crisis when central banks began widespread quantitative easing, sparking fears of Weimar-style hyperinflation in Germany. However, the Bulls were ultimately disappointed as inflation was brought under control. This time around, it could be different, according to Oliver Harvey, macro strategist at Deutsche Bank AG. “When we come out of Covid, there is a huge amount of cash. Savings rates have skyrocketed because people got stuck in their homes and are still making money, ”he said. “If inflation reaches 3% to 3.5% in developed countries, a lot of people will notice.” Bulls point to a weaker dollar, which almost always helps bullion, and central bank action to stimulate economic recovery which should also be “Risks to gold prices remain on the upside given expectations of loose monetary policy with real rates remaining low or negative globally, ”said Suki Cooper, Precious Metals Analyst at Standard Chartered Plc. It also sees high public debt fueling inflation expectations. Also in favor of gold: While prices plunged on Pfizer’s first news, subsequent announcements did not elicit the same backlash and the metal changed little after news from Moderna Inc. in November. 16. Spot gold traded at $ 1,873 an ounce on Monday and is heading for the biggest annual gain in a decade. Still, the bear camp is undoubtedly growing. Macquarie Group Ltd. declared the “end of the cyclical bull market” and said that prices had probably peaked. The bank highlighted the increased likelihood of a vaccine introduction in the coming months, as well as its outlook for higher 10-year treasury yields. , which hit its highest since March when Pfizer was first announced. Over the weekend, the head of the U.S. federal government program to speed up a vaccine said vaccines against Covid-19 would “hopefully” start in less than three weeks. The prospect of a vaccine rollout could also reduce the potential for future stimulus from the government, particularly “It is unlikely now with a divided Senate that this serious level of tax spending will continue,” said Darius Tabatabai, head of transactions. at Arion Investment Management. Gold could also suffer as investors invest in other assets. classes likely to benefit from the economic recovery. And even in a scenario where the dollar continues to weaken or inflation rises, gold stands to lose to Bitcoin as an investor’s hedge of choice. When the virus is brought under control and confidence returns, fund managers will likely turn to risk. and value, which means that “the bull run for gold is coming to an end and is likely to reverse,” said Rhona O’Connell, head of market analysis for EMEA and Asia at StoneX Group Inc. “But the back and forth over the past two weeks is a true reflection of the fact that this is a vaccine, not a cure, and there is a long way to go before we didn’t get out of the woods. For more articles like this, please visit us at bloomberg.com now to stay ahead of the curve with the most trusted source of business information. © 2020 Bloomberg LP