Gold: What next after yesterday's $100 crash?
Yesterday was not a good day for gold; the precious metal crashed from highs above $1960 to lows around $1850 and proceeded to end the day roughly $100 lower than where it opened (with spot prices ending the day in the $1860s).
Driving the move lower was an announcement from Pfizer and BioNtech’s Covid-19 vaccine had shown a 90% effectiveness in preventing infection with Covid-19. More specifically, an increased demand for higher yielding assets such as stocks and EM currencies, which are now expected to perform better in 2021 given the earlier than expected discovery of a workable vaccine drove investors to sell their zero yielding gold holdings.
Meanwhile, US and other developed market bond yields shot higher as the vaccine news reduced the expectancy for more QE from the Fed and other major central banks in 2021 (while reducing the need for aggressive fiscal stimulus). Higher yields on fixed income assets make gold less attractive (as noted, gold gives you no return aside from potential capital gains if the price goes up). This was also a big contributory factor in gold’s drop yesterday.
So, what next for the precious metal?
Yesterday’s news adds to the argument that gold might have seen its top from the bull run of the last two years.
One of the major factors boosting demand for gold over the last two years has been global central bank easing (and massive QE programmes) which have driven interest rates lower across the globe and increased the attractiveness of precious metals.
If the Pfizer/BioNTech vaccine turns out to be as good as hoped, as well as other similar vaccines (such as the Oxford/Astrazeneca vaccine), then an end to the pandemic as we know it currently has been brought substantially closer. In other words, fingers crossed we might now be on course to see an end to economic restrictions that have so damaged the global economy by Q2 2021.
This is not something that markets were thinking about only two weeks ago.
An end to the pandemic does not mean an end to central bank accommodation; most central banks have been struggling with low inflation for years and will likely continue to do so long-past the end of the pandemic in 2021. So stimulus is likely to stay for now (indeed the FOMC are forecasting no hikes before 2023).
But for gold to keep pumping to the upside, we need MORE stimulus from global central banks. If the global economy starts to roar in 2021, this will be hard to justify. Thus, the argument for gold to make fresh all-time highs in 2021 has been weakened substantially.
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