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Sun 26 Apr 2020 04:09 PM

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Can historic oil price weakness, along dismal economic reading, push gold above $1,800?

World markets are nowhere near as strong as stock market performances might indicate

Can historic oil price weakness, along dismal economic reading, push gold above $1,800?

Jameel Ahmad, global head of currency strategy & market research at FXTM.

The trading week ending April 24 will long be remembered in the minds of those who watch global markets, although unfortunately for all too many of the wrong reasons when it comes to economic sentiment.

From US oil prices falling below negative for the first time in history and economic data readings in both Europe and the United Kingdom highlighting weakness that has not been seen since records began, to the blunt words from the International Monetary Fund (IMF) that the ‘Great Lockdown’ recession would be the steepest in close to 100 years, it is clear that pessimistic economic headlines will not be going away anytime soon.

And all of the above was before the latest weekly initial jobless claims released in the United States showed that in the past five weeks more than 25 million Americans filed for unemployment benefits. To put into greater context how serious this pandemic has been to the US economy (one of the strongest in the advanced world) the number of jobs lost in the previous five weeks has now erased all of the jobs that the economy created in the past 12 years.

World markets are nowhere near as strong as stock market performances might indicate, which provides a heavy dilemma for any investor right now when trying to make a decision on which financial market asset class to keep in their portfolio.

Two of the most impressive stocks in 2020 so far have been Netflix (30 percent) and Amazon (also 30 percent) although the performance of gold, at a more modest 12 percent advance remains on the eye of many and is still managing to add to its valuation that is nearly $500 higher valued since the opening of 2019.

While it is very true that the world economy as we knew it to be was intentionally brought to a standstill from governments to fight the most infectious virus to hit in 100 years, there are indications that turning it back on will not be as simple. Health officials are not in sync on how long it will take for a cure to be found.

I doubt jobs will return as fast as they disappeared and there is a harsh reality that many small and medium businesses will cease to exist. Consumers, even those with jobs and disposable income, will be reluctant to go out unless there is clear science that suggests the pandemic risk is in the back mirror. This ultimately results in more pain for a global economy that is already under high threat of exiting the lockdown restrictions in a terrible condition.

The trend that can be seen from world officials and stimulus is that they are not giving up on their commitment to provide support, which essentially has meant for investors that more free money is accessible and this is what can make gold an interesting proposition to monitor.

After all, recent history has shown that continued monetary stimulus and eased policy from central banks, along with fiscal support, has supported the precious metal and there isn’t a clear indicator available yet that suggests this time is different.

Perhaps lightning will strike twice for gold prices and it will emerge out of this recession as a similar clear winner to how it has been remembered from the 2007-2008 global financial crisis?

Jameel Ahmad, global head of currency strategy & market research at FXTM

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