Gold price closing in on its 2011 all time high

8 July 2020

WHAT’S NEW - Yesterday the gold price passed the USD 1,800 level for the first time since 2012. The price has been rising quietly but steadily this year, with only a minor setback in March. It has gained close to 20% year-to-date, making it one of the world’s best investments for the 2020. Will it manage to reach its 2011 all-time high of close to USD 1,900?

OUR TAKE - The rally in the gold price is impressive when we take into account that the metal has been facing serious headwinds this year. Demand from emerging market consumers has been under major pressure due to the Covid-19 pandemic, with India’s imports plunging by 99% in April/May and Russia’s central bank halting its gold purchases after the oil price collapsed. Developed market investment demand, in the form of gold coins as well as investment flows into gold ETFs, has fully offset these weaknesses, allowing the gold price to continue to rise. DM demand is mostly driven by negative real rates and fears of currency debasement, caused by pandemic-induced unprecedented fiscal and monetary stimulus. Although the 2008/09 GFC was not followed by high inflation, things may be different this time around, as monetary and fiscal stimulus has been much greater and there is less political will for austerity. Policy uncertainty tends to jump after recessions and remain high for several years, feeding debasement fears and supporting the gold price. Post-2008, policy uncertainty only receded in 2013, causing the gold price to retreat.

WHAT’S NEXT - We will continue to closely monitor inflation expectations and central bank policies as they hold the key to the further development of the gold price.

MARKET REVIEW

EUROPE - European equity markets ended lower on Tuesday. Basic resources and chemicals led the market, while real estate and banks were the main laggards. On the macro front, the EU Commission's latest forecasts see a deeper recession in 2020 due to Covid- 19, while the economic recovery will be more muted than previously expected in 2021. Elsewhere, the Organization for Economic Co-operation and Development said unemployment was expected to hit its highest level since the Great Depression and warned against a premature removal of stimulus. On the corporate front, Lufthansa launched the second set of measures in its restructuring programme and says there is a calculated personnel surplus of at least 22,000 full-time positions.

USA - US equities finished lower yesterday. Treasuries were stronger with the curve flattening, while the US dollar was better on the yen and euro crosses. Gold finished up 0.9% and WTI crude oil was little changed at settlement after somewhat choppy trading. Covid-19 continues to be the main focus. Hospitals have come under strain in hard-hit states, such as Texas, Arizona, and Florida. Some local governments imposed fresh restrictions and while the sub-5% mortality rate remains a relative bright spot, reports continue to point out that deaths are a lagging indicator. On this point, Fauci, Director of the National Institute of Allergy and Infectious Diseases, warned against false complacency. On the corporate front, Facebook, Google and Twitter suspended the review of Hong Kong requests for user data following the national security law.

ASIA - Asian equities are mostly higher today, with China markets extending gains, as other major benchmarks struggle for direction. On the coronavirus front, Beijing reported zero new coronavirus cases for a second day in a row while Tokyo reported more than 100 cases on Tuesday for a sixth consecutive day, though government officials maintained there was no need to declare a new state of emergency.

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