The record-breaking gold bull market faces an existential question after this month’s pharmaceutical breakthroughs: What will happen to the rally once the Covid-19 vaccines start rolling out?
Gold is viewed by many as the ultimate safe haven asset, inevitably pushed higher in times of crisis. According to this logic, the beginning of the end of the crisis would mark a turning point for the rally. But the precious metal also serves as a hedge against inflation. And with the huge sums of money pumped into the global economy this year, any sign of rising consumer prices could send investors back to bullion.
For most of 2020, conditions could hardly have been better for gold, as the deluge of money printing, the weak dollar and global uncertainty boosted demand, pushing prices higher. Falling real US Treasury rates triggered larger gains in July and August, which ultimately propelled spot gold to a record high above $ 2,075 an ounce.
While prices have fallen slightly since then, investors continued their rush to exchange-traded funds, which, at their peak in October, had absorbed nearly 900 tonnes of the metal this year, more than double the inflow final in 2019.
In a few weeks, everything changed.
Gold suffered its second largest drop in seven years when Pfizer Inc. announced the first results showing that its vaccine was 90% effective. The political wrangling in the United States raises doubts about the future recovery. ETFs, which were so crucial to this year’s rally, posted exits for at least six consecutive days, while bullish hedge fund bullion bets were near their lowest level in 17 months from the week before. November 17.
“The strongly positive news on vaccines bodes well for a real prospect of a return to normal, possibly by the spring,” said Tai Wong, head of metal derivatives trading at BMO Capital Markets. While low rates and the potential for greater government support will help bullion rise over time, “the speed of gold’s rise has likely been tempered in the near term,” he said. .
So, can the bull market stay alive?
The issue of inflation will be key to all perspectives now, and it is not the first time. Gold hit its old record in 2011, just after the financial crisis when central banks began widespread quantitative easing, sparking fears of Weimar-style hyperinflation in Germany. However, the bulls were ultimately disappointed at the time, with inflation under control.
This time it could be different, according to Oliver Harvey, a macro strategist at Deutsche Bank AG.
“When we come out of Covid, there is a lot of cash. Savings rates have skyrocketed because people got stuck in their homes and are still making money, ”he said. “If inflation reaches 3% to 3.5% in the developed world, a lot of people will notice.”
Bulls point to a weaker dollar, which almost always helps bullion, and central bank action to stimulate economic recovery which should also be favorable.
“The risks to gold prices remain on the upside given the expectation of loose monetary policy, with real rates remaining low or negative globally,” said Suki Cooper, Precious Metals Analyst at Standard Chartered Plc. It also sees high public debt fueling inflation expectations.
Also in favor of gold: While prices plunged on Pfizer’s first news, subsequent announcements did not elicit the same backlash and the metal closed shortly after Moderna Inc. news on the 16th. November.
However, the bear camp is undoubtedly growing. Macquarie Group Ltd. this week declared the “end of the cyclical bull market” and said prices have likely peaked.
The bank highlighted the increased likelihood of a vaccine introduction in the coming months, as well as its prospects for rising 10-year Treasury yields, which hit their highest level since March when Pfizer was first announced. .
The prospect of a vaccine rollout may also reduce the government’s potential for future stimulus, particularly as long as Senate oversight remains unresolved.
“It is unlikely now, with a divided Senate, that this serious level of tax spending will continue,” said Darius Tabatabai, head of trading at Arion Investment Management.
Gold can also suffer as investors invest money in other asset classes that may benefit from the economic recovery. And even in a scenario where the dollar continues to weaken or inflation increases, gold stands to lose to Bitcoin as the hedge of choice for investors.
As the virus is brought under control and confidence returns, fund managers are likely to move towards risk and value, meaning that “the bull run in gold is ending and likely reversing”, said Rhona O’Connell, head of market analysis for EMEA. and Asia at StoneX Group Inc.
“But the back and forth of the last fortnight is a true reflection of the fact that this is a vaccine, not a cure, and there is still a long way to go before we come out of the woods. ”
– With the help of Jack Farchy.