Gold has soared by around a quarter this year and despite breaching all-time highs, a weak dollar and coronavirus second wave mean the precious metal could go higher.
Analysts believe gold is set to surpass the ‘mythic’ $2,000 an ounce barrier, after hitting an all-time high on Monday and continuing its march into record territory before a pullback.
Gold hit $1,981 an ounce in Asian trading before falling back to $1,932 by 11am today, according to Bloomberg data, as the US dollar rallied. That is still above the previous high watermark of $1,921 an ounce hit in September 2011 in the teeth of the European debt crisis.
The precious metal has now risen in value by 27% this year, accelerating in the last fortnight, with continued support coming from a weaker US dollar, second waves of Covid-19 and lack of faith in the stock market recovery.
Weak dollar, dovish Fed
‘Whilst the rally in the precious metal is pausing for breath we very much doubt that this is the peak,’ said Fiona Cincotta, an analyst at spread betting firm City Index. She added that, at the peak, gold had advanced 9% over the past six trading sessions.
Coronavirus fears, elevated US-China tensions and the prospect of an additional $1tn stimulus package in the US were put down as central factors behind the fresh rise, with the next moves to be dictated by the outcome of a Federal Reserve policy meeting today and tomorrow.
‘Expectations are for a dovish Fed, willing to see inflation pass its target before rates will rise, potentially adding more pressure to the US dollar. A weak greenback is gold positive, making it cheaper for international buyers,’ said Cincotta.
Other analysts likewise cited the pressure on the dollar as key, given bullion is priced in the US currency, with the Fed’s meeting overshadowed by surging outbreaks in economically important states like California, Texas and Florida.
‘The market’s fears over escalating tensions between the US and China, as well as the ongoing domestic disaster that is Trump’s handling of the Covid-19 pandemic, has seen investors dump the dollar en masse,’ said Spreadex analyst Connor Campbell, who also referred to the ‘mythic’ psychological impact if gold were to breach the $2,000 mark.
‘By no means over’
‘We think gold could easily go through $2,000 this year, with this week’s US Federal Reserve meeting potentially triggering another move up,’ said Adrian Lowcock, head of personal investing at funds supermarket Willis Owen.
‘It is fair to ask whether, after a rally of this magnitude, if gold has any value left for investors.
‘However, this crisis is unfortunately far from over. We are yet to see the full impact on the US economy, or the global one, and more stimulus looks set to come as countries spend vast amounts to keep unemployment down.’
Broker AJ Bell’s investment director Russ Mould said several metrics suggested gold’s strong run was ‘by no means over’.
According to AJ Bell, at the level of $1,935 an ounce reached yesterday, the gold price stood at 0.59 times the number of index points of the S&P 500. That was ‘barely half’ the post-1970 average of 1.14, as well as well below the 1.6 times multiple hit during gold’s previous all-time peak in autumn 2011.
‘If inflation does pick up – perhaps thanks to the combination of record low interest rates, quantitative easing, supply-chain disruption around the world thanks to Covid and firms increasing prices to meet extra costs of simply staying in business – then this suggests gold has further to go or, alternatively, the S&P 500 is about to suffer a nasty accident,’ said Mould.
He added an argument could also be made that gold equities were still cheap, despite the share prices of leading producers like Newmont Mining (NEM.N) and Barrick Gold (GOLD.N) rising more than 50% so far in 2020. According to AJ Bell, the HUI Gold Bugs index still stands at 0.18 times the value of gold, compared to a lifetime – post-1997 – average of 0.31.
Risk of profit taking
Still, some analysts argued despite strong fundamentals gold’s surge looked overdone.
‘The soft US dollar, low-to-negative US real yields, rising inflationary pressures, the risk of global stagflation and the slippery market conditions remain supportive of a strong gold in the medium, long run,’ said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
‘However, the rapid surge in gold prices also increases the risk of swift profit taking and a sharp downside correction.’
Ozkardeskaya pointed out precious metals miners had risen in parallel to the gold price, with Fresnillo (FRES)’s shares up more than 90% this year and over 130% since March.
‘Any significant correction in the precious metal should also trigger a decent retrace in these stocks,’ she said.
Gold trust & funds on the up
|Fund||Year-to-date total return (%)|
|Golden Prospect Precious Metals (GPM) investment trust||122.2|
|Ruffer Gold fund||76.3|
|Junior Gold fund||71.1|
|Ninety One Global Gold fund||56.1|
|BlackRock Gold and General fund||52.4|
|Quilter Investors Precious Metals Equity fund||50.2|
|Charteris Gold and Precious Metals fund||45.7|
|Smith & Williamson Global Gold and Resources fund||45.1|
|Merian Gold & Silver fund||36.2|
Funds and trusts investing in gold miners have ridden gold’s rise this year, putting them near the top of performance lists, especially in the case of those focusing on smaller miners.
Shares in small caps-focused investment company Golden Prospect Precious Metals (GPM ) have risen a remarkable 122.2%, helped by a narrowing discount to net asset value.
Gold equity managers told Citywire at the beginning of June that miners were now much more efficiently run than the previous peak in 2011, meaning price rises now translate more directly to profits, leaving the sector well-placed to capitalise on current conditions.