By Jameel Ahmad
Covid-19-inspired low interest rates and jump in government debt could push prices up beyond $1,900
The disconnect between world stock market valuations and the harsh reality of economic data releases highlighting how strictly the global pandemic has impacted the world economy continues to puzzle those who watch financial markets.
What is equally as difficult to explain is that although a number of major stock markets have recovered a material amount of their losses following the ferocious sell-off at the beginning of the pandemic, there are still a number of trends apparent from investors, that suggest they are still keeping safe-haven assets close to their chests.
The US dollar for one, remains at strong levels historically across an overwhelming number of its counterparts. While, the real spotlight for investors for the trading week that has just completed is spot gold prices - which reached its highest level since October 2012 above $1,765.
The move higher in gold is applauded by those who think the challenges the global pandemic will bring to the world economy will remain in place far after it is over, including a new era of extremely low interest rates from world central banks and an unforeseen jump in government debt.
These factors plus more are keeping hopes alive that the precious metal will eventually be able to gradually advance back to all-time record high levels above $1,900.
I also believe that this is a possibility (eventually), but it will not be one-way traffic and for as many bumps higher in price that buyers are keeping their fingers crossed for there will also be declines as investors take profits on positions.
It should not be forgotten that for as unprecedented as the financial market environment has been for the past few months, gold prices are close to $500 higher than their lowest point of January 2019. This equates to a near 1/3 of their value overall and corrections lower following steep climbs are not to be ruled out.
For those hoping to keep the fire ignited for gold prices to continue the incline higher there are a few trends to watch out for. The first one and eventual remedy to get us all over the hump of the global pandemic is an actual vaccine coming out as successful following trials. The longer it takes for a vaccine to be sourced, the worse the economic aftermath will be for all of us.
Should we find out that fingers crossed, a vaccine is approaching, then this would unofficially rule out bullish expectations for gold price.
If the health professional advice is to be correct with their view that a vaccine would take a substantial amount more time to develop, then there are other near-term factors that will also impact gold prices. The economic aftermath has already been highlighted above, but one near-term risk that will soon become clear is what influence the easing of lockdown restrictions is having on disease infections.
Should we unfortunately learn that the eased lockdown measures which still carry with it a number of different restrictions are contributing to new disease outbreaks that need to be contained, then there is always a threat that government officials will revert back to stricter lockdown conditions.
This isn’t the type of news that stock markets would appreciate hearing, but it might be the helping hand to push gold prices towards further heights.
Jameel Ahmad, global head of currency strategy & market research at FXTM