Bullish vs Bearish sentiments for gold
Recession and pandemic have been good supporters for gold this year. Gold has advanced 16.7% since March 2019. Simultaneously the dollar has dropped 6.8%
All this while, gold continued to find additional support from some of the bearish factors including concerns over a second wave of infections, and raised geopolitical uncertainty.
This week too, gold found support over Federal Reserve statements. Fed ruled out any rate hikes for the next couple of years. On Wednesday, the Fed announced that it is keeping its key interest rate unchanged at a range between zero and 0.25% while signalling no rate hikes through 2022. The Fed also said it expects U.S. GDP to contract by 6.5% this year. Simultaneously it boosted expectations that [quantitative easing] will be in operation for the time being.
In response, gold prices rallied, reaching slightly above $1,750 an ounce on Thursday while equities saw major losses. This move benefited gold as an accommodative monetary policy is negative for the yields and for dollar, while positive for the yellow metal hence gold managed to pull through the mid-range resistance band of $1700/$1725.
Any form of strong financial stimulus is made with the intention of boosting the economy. Now given the situation, the market is once again divided into bears vs. bulls for gold.
The ones, who are bearish, have cautioned that gold will remain in a tight range. Currently it has been sustained by stimulus measures world over and hence it will require a very strong influencer to pull it back into a higher range.
The Fed’s extreme money printing igniting these unstable stock-market heights is worryingly inflationary, making upping gold portfolio allocations essential. This ongoing capital shift is likely to keep pushing gold higher.
But still many investors continue to remain in a dilemma about portfolio diversification per se gold.
Now for the ones who are bullish believe that gold is being constantly supported by the current geopolitical crisis. There has been news that the number of U.S. coronavirus infections were rising, with recent reports indicating that Arizona and Texas are showing increased cases. Moreover, worries of a new wave of COVID-19 cases clouded hopes of economic recovery.
Just when China was grounding itself towards economic recovery, it once again saw fresh Covid cases resurfacing. After weeks with almost no new coronavirus infections, Beijing has recorded dozens of new cases in recent days. And if this was not enough, US too witnessed Covid hospitalization in record numbers.
Further, The World Bank released its latest economic outlook and global GDP which is now predicted to fall by 5.2% this year. The recession could be the worst since the Second World War. Certainly, lockdowns are being eased and central banks and governments have pledged huge sums of money to support their economies. However, the economic recovery will take quite some time and even a slightest onset of a second wave of Covid infections, will once again create a panic like situation.
This comes amid enormous federal rescue efforts, with the Treasury Department aiming to borrow $3 trillion to cover the tab. To bolster the government’s campaign, the Federal Reserve intends to buy enormous amounts of the new Treasury bond supply. This manoeuvre is called quantitative easing (QE), which also is aimed at holding down interest rates.