Gold remains an attractive investment option

23 June, 2020

After declining 5.4% from the peak reached on May 18, gold is again flirting with the key resistance level and recent multi-year high of $1,764. The resurgence in the precious metal price has coincided with a record increase in global coronavirus cases and as of Friday, the SPDR Gold Trust holding saw a rise in net inflows of 2%.

While many investors do not like gold as an asset class given that it pays no interest, those same investors may find the precious metal a better alternative to many other asset classes.

The stock market rally is clearly losing steam and there isn’t much incentive to keep the bull market running much longer. Equity prices have already discounted the actions taken by central banks across the globe and another big round of stimulus is not likely at this stage. Assuming the S&P 500 remains in the range of 3,000 to 3,200 until year end, it will be trading at a price to earnings multiple of 24 to 26 times for 2020, and 19 to 20 times for the end of 2021. That is considered the most expensive market since the dot com bubble.  This isn’t to say that equities are due a sharp correction, but to continue moving higher they need a fundamental positive surprise on two fronts, economic and earnings, which is currently far from the base case scenario.

What is more important for gold is where fixed income markets are heading next. Today the US 10-year real yields are trading at -0.61%, and when excluding the one day drop to -0.98% on March 9, that’s the lowest level for real yields since 2013, the year when the Federal Reserve delivered a huge shock to financial markets by revealing their intention to withdraw stimulus.

Real yields in Europe are even lower than those in the US, especially in Germany and that is terrible news for people approaching retirement as it seems they are now assured of a pension that will fall in value if they don’t take a riskier approach. And with the trillions of dollars in government and central bank stimulus since the start of Covid-19, we shouldn’t be surprised if inflation begins edging higher. That will be another hit for savers.

The notion that central banks will follow Japan in targeting yield curves is growing. Keeping short and medium-term yield maturities under pressure may sound like good news for risk taking, but again the price will be paid by the elderly as real yields fall further into negative territory. This should make gold a great hedge against negative yields, devaluation of currencies, an unexpected surge in inflation or deflation, poor economic performance and shocks in equity markets.

Latest surge in risk assets to be challenged by data and US Congress3 Aug, 2020  

After their astonishing performance in July, Asian equities kicked off the month of August in a more mixed fashion with the major indices in China and Japan...

Real yields sinking24 Jul, 2020  

US real yields, which take out the expected consumer price changes from the nominal yield on bonds, are plunging at present and have fallen to their lowest levels since 2012.

Q2 Earnings: Tesla test awaits22 Jul, 2020  

Tesla shareholders are set to face a litmus test when the electric carmaker's Q2 earnings are released after US markets close on Wednesday...

Global equities begin the week on the back foot20 Jul, 2020  

Shares across global markets are trading in negative territory early Monday with one exception, as China's Shanghai Composite traded 2.5% higher...

Indecent earnings please equity bulls16 Jul, 2020  

The greenback is suffering today, slumping to a one-month low as stocks surge back to reclaim the June highs. Hopes for Moderna's vaccine are elevated...

Apple chips to overcome Intel silicon valley23 Jun, 2020  

After years of rumours, it's now official: Apple is breaking up with Intel. At its Worldwide Developers Conference 2020, which kicked off on Monday, Apple...

Week ahead offers healthy dose of reality22 Jun, 2020  

Global investors are set to be given a healthy dose of reality this week, which could help them firm up their outlooks for the global economy. Until there is.

US consumers join the party17 Jun, 2020  

The hotly anticipated US retail sales figures were released earlier this afternoon and they didn't disappoint with more records broken. The headline number topped...

Gold Market Daily: Bears calling the shots9 Jun, 2020  

Gold on the D1 time-frame was in an extended uptrend until May 18 when a higher top was recorded at 1765.08. Supply pressure increased...