All that glitters is gold! And it continues to outshine

Gold is scrapping the skies to climb well above $1,800 levels in recent times. The current uptrend in the gold reassures that the dominance of gold could remain throughout 2020. Our first target on gold got achieved that was given in our previous report and with that, we continue to remain bullish on gold-seeking for the next target. Adding to the list for the rally are the reasons given below as to why the yellow metal will keep shinning.

Second wave of COVID

: A second-wave of coronavirus cases could put the world economy to a standstill again led by further lockdown. With the world sitting at home and having no will and/or money to spend could bring an economy to its knees. As the number of coronavirus cases continues to rise across the world, the price of gold is also rising as more and more investors are reaching to safe heavens because it is the most uncertain time for equity or any other type of asset class.

IMF growth forecast: The International Monetary Fund predicts a decline of almost 5 percent in 2020, substantially worse than its forecast in April. The report warns that there is likely to be more economic scarring. More firms going out of business and people being unemployed for longer may mean that it is harder for economic activity to bounce back as quickly as hoped. The extent of the recent rebound in financial market sentiment appears are not in sync with the underlying economic prospects thereby raising the possibility that financial conditions may tighten more than anticipated.

More stimulus likely by the central banks: Many developed and emerging economies see the need for more emergency stimulus to support the economy. So far the US, UK, and Europe have announced a stimulus of around 13 percent, 21 percent and nearly 5 percent, respectively, of their GDP respectively. Further realizing the need for additional support, US is expected to announce $2 trillion worth more stimulus and UK recently announced a second package worth GBP 30 billion. Rise in the money supply in a way means a rise in debt levels. The way countries have increased their debt level, it could create a bubble and shall keep inviting worries in the long run. As central banks across the world begin the money-printing program, this excess of liquidity could lay the groundwork for gold to revisit the previous all-time high.

Rise in Inflation: On the other hand, increasing the money supply by dramatic amounts in an economy is likely to be inflationary. While most of the risky assets don’t perform very well when the economy experiences inflation, gold by its nature increases in value with inflation and hence is considered as a good shield against inflation. People tend to hoard more gold in order to hedge themselves against rising inflation, thereby increasing its price in future.

Gold rally after 2008 crises: If we go back in history, gold had been persistently rallying for a couple of years after one of the biggest crises in 2008. It was crisis time for equity and financial markets and during that period the gold kept glittering throughout. Many major indices including Indian markets had taken a massive hit due to the subprime mortgage crisis. However, gold prices jumped from $716 per ounce to touch the level of $1,910 an ounce by October 2011. When the equity markets around the world are volatile investors tend to heavily rely on safe heaven to preserve their capital. The same tendency is being witnessed presently amid the cloud of COVID surrounding and US elections being on the cards.

SPDR Gold holdings rally: SPDR Gold Trust, the world’s largest gold-backed ETF holdings rally to over 7 year high on COVID-19 fears. The holdings surged from around 875 tonnes in January to nearly 1200 tonnes in the current month. The need for a safe haven by investors, despite further relaxation of the lockdowns and equity gains is likely to keep gold well supported throughout the year.

Summing up the above mentioned factors coupled with the technical breakout in the symmetrical triangle pattern reconfirms that gold is set to touch its second target of $1,910.

Strategy:

In dollar per ounce: Continue to hold for a target of $1,910 and final target of $1,950 (Stop Loss: $1,765)

In Rupee per 10 grams: Hold for a target of Rs 53,000 and final target of Rs 58,000 (Stop Loss: Rs 47,000)

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.