Gold is the most widely recognized safe haven asset. The recent economic turbulence has increased interest in gold. The asset appears poised for a breakout as several technical and macroeconomic factors bullishly align.
The global economy has been rattled by the COVID-19 outbreak. While many analysts had doomsday predictions for future economic growth given the phenomenal growth of the past decade, no one accounted for a virus bringing the business world to a standstill. COVID-19 has truly served as a black swan and has pushed investors to search for liquidity and safe-haven assets.
The exacerbating COVID-19 crisis has been accompanied by a piqued interest in investing in gold. Google search trends for “invest in gold” has recently reached its highest point over the past five years. As the leading equity markets globally record sharp declines, investors have been turning to the most widely recognized safe-haven asset.
Google Trend Results for “Invest in Gold”
A Globally Recognized Safe-Haven Asset
Gold is internationally recognized as a hedge against economic turbulence. The scarcity of the metal combined with the difficulty to mine gold have made it an attractive hedge against inflation and economic downturns.
Gold has historically performed well when economic conditions exacerbate. Both previous US recessions sparked huge run-ups in the price of gold. Gold increased over 263% from the start of the US recession in 2001 to the start of the US recession in 2008. While the US recession in 2008 was followed by a decline in the price of gold, this was followed by an appreciation which brought the price of gold to over $1,800.
Gold monthly price chart with US Recessions highlighted in grey
Gold sharply sold-off with other major assets classes in March as market participants dumped assets in search of liquidity. Gold declined roughly 13% over five days in March to a local low of $1,451. However, the price has since sharply rebounded and is approaching the important $1,800 level. Gold managed to record prices above this level for periods of trading in August and September of 2011 but has since remained below.
Three Reasons Why The Price of Gold May Push Higher
- Breakout Levels
Gold has had significant upside momentum since the market-wide sell-off in March. Price has been appreciating rapidly to the upside and many analysts have been anticipating a test of $1,800. USD is not the only currency which gold is approaching key technical levels in. Measured against the Chinese Yuan, gold looks poised for an outbreak above highs observed in 2011.
- Bullish Pattern on Inflation-Adjusted Gold
When adjusted for inflation, a cup and handle pattern has been forming since the 1980s. Patterns with cups forming over longer periods generate stronger bullish signals. The decades forming the cup part of the above pattern strengthens the odds that gold can break above its breakout levels identified.
- Macroeconomic Developments
Of all the reasons why the price of gold may push higher, the concerning macroeconomic developments observed over recent months is likely the strongest driver. The following developments may act as fundamental catalysts for more capital to transition into gold:
- Monetary base expansion
- Federal Reserve ownership of inflation-protected securities
- Government deficits increasing
M2 money supply increases have accelerated this year. The Federal Reserve has chosen to drastically increase the supply of money circulating around the economy to address the severe economic contraction that will come from the global COVID-19 lockdown.
M2 money supply has increased 16% over the past year to a total of 16.89 trillion. Increases in supply accelerated roughly one month ago with over $1 trillion being added in the space of four weeks. Such drastic increases make the physical constraints of gold more attractive as an alternative.
The Federal Reserve ownership of US Treasury bonds has recently surged to over 50% of their total balance sheet. Roughly 15% of the total Fed balance sheet is invested in inflation-protected Treasury bonds.
With central banks holding a significant portion of the fixed income market, interest rates are driven down and the opportunity cost of holding a non-productive asset such as gold declines. Furthermore, fragilities in the monetary system become more prevalent as increasing percentages of the value in the market is accounted for by central bank balance sheets.
Furthermore, government deficits have been increasing sharply. Governments will struggle to recover their respective domestic economies as the shutdowns from the COVID-19 outbreak take their toll. To fund the deficit, the government will be forced to issue greater levels of debt and the central banks will have little choice but to print more money and place this debt on their balance sheet.
Such developments would further increase the upside potential of having an asset whose supply is restricted by physical constraints. Gold has been widely recognized as a strong store-of-value investment given that production capacity is limited even in the cases where price drastically rises.
Actionable Investment Insights – Gold Products & Gold Mining Stocks
In summary, both technical and macroeconomic developments are aligning to foster huge upside potential for the price of gold. As the COVID-19 outbreak exacerbates, economic conditions become increasingly dire. The actions central banks are taking may serve to give short-term relief but puts the monetary system in a fragile position in the long-term. Many analysts consider gold one of the strongest investments which can be made in current circumstances.
One way to capitalize on upward movements in the price of gold is to purchase investment products which mimic the performance of gold. Products such as the SPDR Gold Trust (GLD) provide such upside exposure. Some forex brokers also pair gold with major currencies as forex pairs. Check out our reviews for the best CFD brokers and the best forex brokers to learn about which online brokerages offer gold instruments. For more risk, investors can also consider buying gold mining stocks such as GDX. Gold mining stocks often outperform gold in rising markets but can be be put under severe pressure during price declines.
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