Gold soars to record high; some see correction soon

Thu, Aug 06, 2020

Uma Devi

https://www.businesstimes.com.sg/ene...orrection-soon

GOLD prices passed the US$2,000 per ounce threshold on Wednesday - a new record for the precious metal. With this, gold has now rallied over 30 per cent this year as the economic stress of Covid-19 continues to weigh on investor sentiment. But some market watchers are warning that a price correction is due.

"The angst of what lies ahead is driving the US yields lower and propelling gold higher," said Stephen Innes, AxiCorp's chief global market strategist.

Mr Innes is among those who believe the gold rally has legs as interest rates should stay lower for longer. "The economic damage is done, and even a vaccine is not going to bring back US$80 billion in global GDP (gross domestic product) that went up in smoke," he said.

"The only real cure to claw back some of that lost GDP is global interest rates (staying) low for as far as the eye can see and even redoubled amounts of government stimulus, which is highly favourable for gold."

But several other market watchers voiced caution and said consolidation is due. The Singapore Bullion Market Association's chief executive Albert Cheng, for instance, sees gold consolidating at US$2,000 and testing US$2,100 in the first half of 2021.

Bart Melek, global head of commodity strategy at TD Securities in Toronto, sees gold prices consolidating at a "somewhat lower level" of US$1,880 per ounce after an "aggressive rally".

Meanwhile, BNP Paribas has revised its 2020 gold price forecasts up with expectations for the yellow metal to average at US$1,765 per ounce for 2020 and US$1,965 per ounce in 2021. This is up from US$1,610 and US$1,500, previously.

The forecasts suggest gold could rally a little more, but would reach a peak soon before regaining momentum next year. What could stand in the way of its continued rise?

Robert Samson, deputy head of global multi-asset at Nikko Asset Management, said gold is currently benefiting from twin tailwinds: a weaker US dollar and the compression of real yields. Nominal yields are being kept low by central bankers around the world even as inflation expectations are on the rise.

Gold, which does not produce a nominal yield from dividends or interest, tends to become more attractive when real yields fall. That is because the opportunity cost of buying gold instead of other safe-haven assets, such as US Treasury bonds or investment grade corporate bonds, becomes lower in comparison.

Mr Samson said: "So long as the (United States Federal Reserve) keeps bond yields low, there is upside for gold in a reflationary environment.

On the other hand, if the Fed decides to normalise policy sooner than expected, allowing yields to rise, we could certainly see a correction for gold."

Mr Samson added that once a Covid-19 vaccine is developed, patterns of demand will "normalise". This could add to inflationary pressures, forcing the Fed's hand.

Even a slight tightening could be a drag on gold's upward trend. BNP Paribas said a slower pace of balance sheet expansion, a reduced pricing-in of rate hikes and broadly normalised inflation breakevens would lead to a stabilisation in real yields. This would allow a "measured consolidation in gold in the coming months", BNP Paribas said.

Real rates might then fall further next year as the Fed stays accommodative, fuelling another gold rally.

At the same time, gold prices could continue to rise beyond what fundamentals would support.

Carsten Menke, an analyst at Julius Baer, said gold is currently trading at the upper end of a "fundamentally justified range." While the market mood is increasingly bullish, triggering warning signals, he said that does not mean the rally won't continue.

"We have the impression that trend followers and technical traders have moved into the driving seat of the gold market, comparable to the later stages of the early-century bull market," said Mr Menke.