Gold glitters as investors seek safe havens

It benefits from the low-interest rates by central banks and govt schemes that flood markets with liquidity


GOLD price is well supported by investor demand for safe haven assets and inflows into exchange-traded funds (ETF) as low-interest rates fuel demand for products like gold bars, coins and jewellery amid rising inflationary expectations.

Weaker bond yield and expectations of inflationary pressure saw the precious metal break above the US$1,800 (RM7,740) per oz mark last week as the Covid-19 pandemic showed no signs of abating.

OCBC Treasury Research economist Howie Lee said some of the cash generated from the extraordinary monetary and fiscal stimulus measures across the world is flowing into gold as well.

“We now think it is a matter of when, not if, gold may set a new record high. The previous record close of US$1,900/oz is now in plain sight and we suspect gold might even attempt US$2,000 per oz before the end of 2020 if the number of Covid-19 cases in the US does not abate,” he said in a note last week.

Lee observed gold’s recent price breakout came after two months of price consolidation.

Between April and May, gold largely traded from US$1,680 per oz to US$1,750 per oz.

“We had initially expected gold to turn downwards as global coronavirus cases stabilised and economic data started to surprise on the upside.

“We had underestimated the pace of second wave contagion across the globe, most notably in the US,” he said.

Lee added that gold endured a heavy selloff in March as financial markets faced an acute shortage of dollars during the initial coronavirus storm in the first quarter.

“Since then, huge injection of liquidity into the financial system from both the US Federal Reserve and Treasury has engineered an exact opposite of what we saw in March.

“Cash from both fiscal and monetary stimulus appears to have found its way into financial markets, dragging US equity markets and the dollar-denominated gold market higher,” he said.

Meanwhile, AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes said the yellow metal is up almost 20% on the year amid non-stop ETF buying.

Gold is benefitting from the low-interest rates by central banks and government schemes that flood markets with liquidity, he added.

“ETFs continue to be the driver. Gold price is well supported at US$1,805 and US$1,785, while resistance lies at US$1,845,” he noted after gold broke US$1,800 for the first time since 2011.

“The ease of the break and how methodically controlled the move through US$1,800 was suggested we could see a lingering bid for quite a while,” he added.

The big question now is what happens next, will the market extend the move to all-time highs or will profit-taking set in?

Gold price action now mirrors post-Great Financial Crisis patterns in several key ways inflation breakevens are coming back with real Treasury rates dropping, Innes said.

He noted a recovery in inflation expectations can gain ground further as copper and oil prices find a more solid footing and thereby drive gold higher even if nominal rates stay flat.

Innes added that technically, gold has climbed through the RSI 70 point last week and in terms of the ETF build, there has been US$35 billion years-to-date, which represents nearly two times the previous two years’ worth of total flows, and there could be concerns about the length of position build.

“We could see some profit-taking set in but it’s hard to ignore the three million coronavirus infections stateside suggesting the long-term economic impact could take years to fix.

“The resulting unprecedented expansion of monetary policy and the deluge of fiscal stimulus will likely support gold even if we get a vaccine,” Innes stated.