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Sun 10 May 2020 08:43 AM

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Spot Gold prices move back above $1,700 - could they be even higher?

Economic recovery will have a large say behind how much further gold prices can extend

Spot Gold prices move back above $1,700 - could they be even higher?

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

Nail biting tension, as well as deep breaths and sighs as economic data releases worldwide gradually confirm the arrival of the worst recession in close to 100 years, has helped gold prices push back above $1,700 for the trading week ending May 8.

There is even an argument to be made that gold prices should be pushing substantially higher than where they already are, but the stimulus measures that world governments and global central bank officials that has been used as more cheap money to fuel recoveries in stock markets has prevented gold from extending higher.

One has to wonder where gold would be valued at right now, if it were not for the return of risk appetite in global market sentiment pushing it away from land and back towards sea? Could gold prices have met $1,900 or perhaps even $2,000? It isn’t impermissible taking into account that this would be another $200-$300 advance for an asset that is already $500 stronger in valuation since the beginning of last year.

The Bank of England made headlines on May 7 with their assumption that the UK economy would shrink by 14 percent in 2020. To put into context how bad of an assumption this is, this would be the sharpest economic downturn in the United Kingdom since 1706.

World sentiment has not been given any helping hands from PMI data stretching from Russia to India and throughout Europe all showing in recent days that activity has fallen to record lows. To make matters even more concerning, data from the United States at the end of the week has highlighted that the economy lost 20 million jobs last month. The battle against the coronavirus has led to the unemployment rate in the United States rocketing to its highest level since the 1940s at 14.7 percent.

There is some light at the end of the tunnel that the gradual loosening of tight lockdown restrictions will bring with it an upturn in economic activity, but we all need to be prepared for a long road ahead. It took around three months for the world economy to transform into this state and we should all be prepared for it to take perhaps double this duration for some form of normality to resume.

Yes, markets are rallying on looser restrictions, but this will still come with a trade-off down the line. The success that government instructions achieve with economic activity while keeping the disease outbreak maintained is going to provide a pivotal assessment towards how long it will take for economies to recover from the brutal shock in recent months and this will also have a large say behind how much further gold prices can extend.

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

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