With gold prices taking out all time highs this week the moves attracted considerable headlines. Also, we had price pull back sharply from the $1980 region with profit taking as gold futures contracts hit $2000. This means that now is a good time to take stock and see what the bull and bear case look like for gold as we see a pause in gold’s move to the upside.
Bullish case for gold
The bulls case for gold has ten reasons that I can see.
1. Very low interest rates globally and and the Fed’s dot plot doesn’t see any hike in rates for the next 2 years. Rate hikes are off the cards for now.
2. Secondly, huge amounts of money are being printed by central banks around the world via their QE programmes. This all devalues currencies.
3. Their are poor returns expected in equity markets with many investors concerned that COVID-19 is going to hinder economic recovery for the medium term for most companies.
4. The growing tensions between the US and China have been elevating again as the November elections grow.
5. Their is an expanding COVID-19 case count in the US with around 25% of all global now being in the US.
6. Gold taking out all time highs is a significant technical break.
7. Th fact that real yields are negative. This means that when you take yields (10 year) and minus the inflation the yields are negative. You lose money buying bonds when you take inflation into account. This boots golds appeal which is normally unattractive because it does not have a yield/dividend.
8. There are growing concerns about getting access to physical gold. The more this builds, the more gold prices will rise.
9. The US dollar is weak and likely to stay weak for the medium term. According to Bloomberg data from the Commodity Futures Trading Commission (CFTC) the US dollar is now heading to register its weakest July since 2010. The CFTC shows that asset managers have added to net long positions on the yen, Canadian dollar and the euro. This is as investors exit the dollar and move into other currencies. These currency moves have further increased weakness in the Bloomberg Dollar Spot Index seeing it fall a large 3.4% this month this month alone
10. There are record holdings in Gold etf’s. According to the world gold council gold etc inflows reached a record 734t in H1. The first half inflows surpassed the 2009 annual record of 656tonnes and lifted global holdings to all time highs of 3621 tonnes.
Bearish case for gold
One Swiss private bank, Lombard Odier, sold half of their gold holdings as price made all time highs this week. See here for an article on it from CNBC. Lombard Odier’s rationale was that the negative US economic outlook is only temporary and real interest rates will return to positive and eventually recover. So, here are two bearish reasons for gold moving forward.
1. The bearish case for gold seems to revolve around a swifter than expected COVID-19 recovery. Presumably this would come if we got a really good treatment/cure for COVID-19.
2. Doing an interview for the Dow Jones this week the reporter (who reported on hedge funds) was telling me that some of the hedge funds are reluctant to buy gold because it is almost seen as beneath the normally more exotic remit of a hedge fund. So, some folks are reportedly staying away from gold due to some kind of financial snobbery.
So, weighing the bullish and bearish case means that gold can still expect buyers on pullbacks in the medium term.