By David Brough
Gold prices seem set for longer term upside if Sino-U.S. relations deteriorate further and if the climate of low interest rates persists well into next year due to the punishment of the world economy by Covid-19.
Gold prices were up 0.39 percent to $1,732.71 per ounce late on May 22.
The combination of a worsening relationship between the United States and China, now aggravated by China’s proposal to impose new security laws on Hong Kong, and rock bottom interest rates, which could turn negative in some economies in coming months, creates strong underlying support for bullion. Gold bears no yield and benefits from historically low rates.
Fears that stock markets are poised for further losses, perhaps triggered by likely dismal second-quarter corporate earnings due to the impact of the coronavirus pandemic, could augur for firming gold prices in the coming months.
Historically, slumps in stock markets have tended to coincide with rising gold prices, as gold is considered to be a “safe-haven” in times of geo-political turmoil.
A potentially deep global recession spurred by the novel coronavirus, which would be characterised by the loss of millions of jobs, could drag further on equities, and weaken the prices of many assets, possibly driving a flight of investor funds into safety in gold.
The reduction in interest rates in leading economies in response to the pandemic, part of wider monetary stimulus measures, could lead to currency debasement, seen as supportive to gold prices, according to a recent J.P. Morgan report.
Several analysts believe that a “perfect storm” of factors engulfing the global economic outlook into 2021, creates an environment in which the gold price could rise towards $1,800 an ounce and eventually test record highs.
“We still stick by our most recent guesstimate of a $1,800 gold price by the end of the northern summer and the yellow metal touching $2,000 – but maybe not staying up there – before the year end,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley, this week.
He referred to a “flood of buying” into major gold-backed exchange-traded funds (ETFs), indicating growing confidence among investors that gold is set for an upwards march in the months ahead.
Disclaimer: Any opinions expressed in this article are solely those of the author and should not be seen as investment advice.