Recently there has been some discussion on the fair value of gold, with speculation on the price exceeding the $1800 marker, there has even been speculation for the price to rise as high as $7000. The idea of gold reaching $7000 does seem excessive to me, I could be wrong, but I am also not going to the mint to pick up a few bars immediately. In today’s blog, I thought I would take the time to identify some of the bearish and bullish conditions that have gold sitting in a match of tug of war.
First let us have a look at what we can consider to be bullish conditions for the fair value of gold. In the blue corner we have the Bulls, usually driven as a safe haven gold has been one of the go to classes when there is uncertainty in the market, little insight there, but important for the rest of this piece.
The backdrop on the Macroeconomic front show cases with risk, there are extreme risks plaguing the globe at this point the most obvious of these is the resurgence of COVID-19. The pandemic has really been a major focal point for much of this year, the talk of V or U-shaped recoveries, vaccines, treatments, lockdowns, have influenced where we all keep our money. Some use mattresses, some use gold, the negative impact of COVID-19 has also driven stimulus to the maximum, we have seen central banks globally increasing their balance sheets and their debt to GDP ratios. This on its own has given plenty of support to gold as concerns of the serviceability of debt and the monetary displacement global invokes “the jitters”.
Its also not the first time we have seen this behaviour, a quick look at the chart below, and you will see that the pattern we are in now is remarkably similar to the Global Financial Crisis. Admittedly the circumstances now are worse than then but its also a very different problem to what we experienced in the last global event.
XAUUSD, Weekly – Gold vs US Dollar. Chart courtesy of Metatrader 4.
Now in the red corner, representing the bearish team, we have the potential for rapid recovery, the result is again largely driven by seeing an effective treatment for COVID-19, I’m sceptical on the potential for a vaccine purely because they have been trying for more than 20 years with little success, but regardless, treatments maybe.
Should the COVID-19 side of things improve it does open the doors for a variety of effects. Governments, businesses, and consumers will be more confident in the overall outlook of the global economy. This equates to more confident decisions across the board, more confident decisions lead to retreating stimulus, a more obvious recovery in the macro data. These would impact the hearts and minds of investors, no longer would they need to maintain a safe haven position, and a push towards a risk on approach would likely occur.
So, in the scheme of things these are the leading factors that should we see a major change will significantly impact price. Failure to see any change in the above brings another question, where else would we keep a highly liquid investment with prospects of safety, the only stand out to me is the United States Dollar, the factor of a more liquid alternative may attract some investors, should the above scenarios never change.
Regardless of the situation that unfolds in the future, until better treatment options, a shift in the economic growth and the very hard task of walking back stimulus, the fair value of gold will be an the point of a double edged sword.