Hopes for stimulus and optimism about the vaccine have brought back demand for risk to the market. The Nasdaq 100 index closed at historic highs on Monday and is testing 11,000 on Tuesday morning on reports that the U.S. authorities are preparing a new stimulus package of more than $1 trillion. In addition, the EU authorities have agreed on a new seven-year budget of more than 1 trillion euros, effectively doubling the previous one. Both S&P500 and German DAX were above the closing levels of 2019, reflecting the impressive interest of buyers.
However, the markets are also increasing the demand for gold and silver. These instruments often show accelerated growth against the background of inflation fears. In addition, gold is bought together with stocks, thus hedging the risks of the stock market drop, if the situation suddenly follows a less favorable scenario.
The story is also on the side of gold bugs. In 2008, the gold price returned to growth immediately after an acute phase of decline amid the collapse of Lehman Brothers. Subsequently, gold almost tripled in price during a 3-year uptrend from $678 to $1920. The main driver at that time was the unprecedented rate cuts and the launch of QE. It is important to remember that gold growth and policy easing began long before the acute phase, which temporarily restarted the trend, but did not fully reverse it.
The current situation is very similar to what happened 12 years ago. Gold has been growing steadily for over a year now, having received the initial impulse on the Fed’s hints of policy easing and further rate cuts. In the 10 months prior to March 2020, the price of an ounce rose by more than a third to $1700 and then briefly adjusted to $1450. Having stood close to these levels for a few days, gold recovered quickly, gaining since then and yesterday updated its 9-year high at $1820.
Despite the fact that gold looks overbought on some short-term indicators, it should be remembered that an important driver of its growth is the fear of inflation, which can intensify because of abnormal stimulus packages and the need for investors to balance the portfolio because of equally inflated stock prices.
It won’t be surprising in such conditions, if before the end of the year gold not only updates the historic highs at $1920, but also tests the level of $2000.
Silver should not be forgotten as well. This metal is more tied to the pace of industrial production than gold but is capable of even larger dynamics during the economic boom. From the lowest level of $8.4 per ounce in 2008, silver jumped to $50 in less than three years, showing an almost six-fold growth increase. In March this year silver was down to $11.3, and this morning overcame $20, rising to its highest level since 2016. If we exclude the March drop, the silver just pushed off the bottom and started growing.