• Joel

Gold at Highest Since Early 2012: Here's What's Next

Gold this morning powered to highs of just underneath the $1780 level, a stunning rebound after falling to lows of around $1680 earlier on in the month.

The major theme supporting the precious metal over the past few weeks has been growing concerns regarding a second wave of Covid-19 in key markets such as the US and Europe.

At the start of June, the US was recording just over 20k new Covid-19 cases per day. Yesterday, over 35k new cases were recorded, only slightly below the worst daily case count of 36.4k in the midst of the New York outbreak in mid-April.

The new hotspots are in the South of the US and in California; new cases and hospitalisations in Texas, Florida, Nevada, Arizona, South Carolina and California are all growing at an exponential rate.

Meanwhile, lockdown has been re-imposed in Germany’s of North Rhine-Westphalia state amid a new outbreak there.

In my last blog on gold last week, I noted how gold has been caught between conflicting fundamental forces; supporting the precious metal has been the continued dovish policies of the world’s major central banks, while weighing on it has been strong risk on appetite amid growing expectations for a V-shaped recovery amid economic re-openings and stronger than expected data.

These “second wave concerns” these that latter force, that of the market’s strong risk on appetite, seriously to the test.

Put more simply; the combination of global economic reopening, coupled with better than expected recent data out of the US and Eurozone has increased expectations for a post-lockdown/Covid-19 first wave V-shaped recovery. This has given risk appetite a substantial boost, sending risk assets such as stocks higher (and the Nasdaq 100 to all time highs) and keeping a lid on gold.

However, this second Covid-19 wave that we are seeing in certain parts of the US and Europe is putting this V-shaped recovery narrative under threat. With the reimposition of lockdowns as a result of a second wave comes further economic contraction, not recovery.

Today we have seen risk assets sent lower on second wave concerns, and as the US outbreak worsens, risk assets could come under further pressure, increasing the demand for safe haven gold even further.

Perhaps even more importantly for gold, however, is the fact that with a second Covid-19 wave likely comes even more monetary stimulus from the Fed and other major central banks across the globe.

As I always say, gold LOVES central bank stimulus. For the reasons outlined above, I remain medium-term gold bull, despite the precious metal currently trading at expensive levels. 



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