Gold’s Rally leaves a message behind for the Economy

When the virus first started to spread and we all ended up in quarantine, there came a time when Gold’s prices plunged.

At the time, it was quite intriguing to see how the global economy started to collapse and soon, it would show us how this was a great head fake in the financial markets. This is because after a while, we will see how the pandemic will become a driving force of the gold market rallies.

In the close of trading, on Friday in New York, the bullion had gone up to $1,902.02 an ounce, which is 30 per cent higher than what hit in March. Moreover, this was 1 per cent high of the record set in 2011.

Due to the pandemic, there are various forces being released that has increased the demand of gold due to the perceived notion that it would provide them safety in this time of need. The fear of more lock downs by the government; and the push of decisions through stimulus packages by politicians; and the decisions taken up by central bankers’ to print more money. Moreover, the fall in inflation adjusted bond surrenders into negative US territory and the decrease in yen and euro.

When piled up together, all of these have sparked concern in almost all financial rings that, stagflation; which is the rare combination of rising inflation and slow growth which ruins the value of income investments, especially the fixed incomes, could take over many developed parts of the world.

In the United States, the virus is still at full rage and the recovery of economy is being stalled, which is why this debate is spiking up. By measuring break evens, it has been deduced that investor expectations have risen higher in the past 4 months after decreasing in March. They hit 1.5 per cent on Friday. While that is below levels before the Pandemic and the Federal Reserve’s 2 per cent target, it is still around a per cent point more than 0.59 per cent yield which benchmarks the 10 year Treasury bond pay.

The real rates which have been plummeted and do not show chances of easing are the reason behind the gold rally.

Since gold has no interest rates, you do not have to worry about not getting interest on it. As the interest rates are near zero, with the current situation, gold has become an attractive option.

A huge upside has been predicted by analysts for gold. The Bank of America Corp., in April, raised the price target of 18 months of gold to $3000 per ounce.

BoA’s head of derivatives research and commodities explains how the pandemic has assisted in providing a boost to gold. Furthermore, China’s GDP has started to converge to United States’ levels, causing a geopolitical tectonic shift due to COVID-19. This supported the case of $3000 target over the span of eighteen months.

The Bank of America made its daring prediction after gold’s prices dropped, due to investors seeking cashing to make up for the losses on risky assets. During 2008- 2011, $2.3 trillion of debt was bought by the Fed and held zero per cent borrowing costs, which helped bullion a record of $1,912.17 in 2011.

The head of trading at Swiss refiner and dealer MKS PAMP Group, says that the crisis back then was all about banks, but now, sees gold pointing at $2000.