The gold price in USD terms has risen 12% since the beginning of the year, as it continues to take on the role as a safe-haven asset in the midst of the economic damage being done by the forced lockdowns to contain COVID-19. The vast majority of Wall Street analysts and portfolio managers are starting to see gold as a core part of their portfolio to mitigate the risks created by the unprecedented monetary and fiscal stimulus.
Elliott Management is one hedge fund to bet on gold so far in 2020. The fund which manages about $40 billion in assets and is run by renowned investor Paul Singer, and he said in a letter to clients last month that gold was "one of the most undervalued" assets available and its fair value is "multiples of its current price.”
Bank of America forecast in April that prices could almost double to $3,000 by the end of 2020, while UBS followed suit predicting that gold could gain 5% more from current levels. But, the medium-term fundamentals of gold are extremely bullish, and these forecasts really undersell where gold could go in the next 3 years.
It’s well publicized the amount of stimulus that has been injected into capital markets over the last few months and subsequent potential impact on gold, however, the market hasn’t really started looking at the long term COVID-19 effect on globalization, in particular the inflationary impact of localizing supply chains and increasing trade tensions between China and the US.
Gold Gains
Some supply chains are expected to shift back to demand centers and others to become geographically diversified. Trade tensions are already rising as the ‘blame game’ of COVID-19 intensifies. Recognizing the risks associated with critical products being outside the control of governments was laid bare during the initial stages of the crisis, and it’s realistic to recognize that we won’t see a truly global economy re-emerge from lockdown.
The deflationary impact of globalization has been felt for the last 30 years; if this curve shifts, which we are expecting, and there is a reversal in globalization to a more nationalist approach, the inflationary impact could be significant. This is coupled with record corporate and sovereign debt levels conflicting with central bank ability to truly smooth the economic impact of inflation.
What does this all mean? With $3 trillion dollars being added to the stimulus in the U.S. alone, global sovereign debt is at record levels, and only increasing. Additionally, costs are being driven up for consumers by shifting production back to the local manufacturing zones. Monetary policy is effectively broken at zero rates, and thus we are limiting the levers to smooth economic growth, and in the U.S. unemployment is approaching 20%. Inflation is coming, and more than likely in the form of stagflation. Gold will be one of the main benefactors of an inflationary environment, having already proven to be a store of value throughout history.
Gold Positioning
The World Gold Council (WGC) recently reported that globally, gold-backed ETFs (gold ETFs) added 170 tonnes(t) – net inflows of US$9.3bn (+5.1%) – in April, boosting holdings to a new all-time high of 3,355t. Assets under management (AUM) also piqued at a new record high of US$184bn as gold in US dollars moved higher by 5.8%.
We are clearly seeing the market drift towards gold as an asset to protect against the unknowns created by decades of leverage, changing geo-policitial landscape and de-globalization. With COVID-19 acting as the catalyst for dramatic change in macro outlook for investors. Current market positioning across ETFs, futures and physical more than likely makes the market susceptible to a short-term downdraft. Either as a result of a further risk off in equities, and/or USD strength, however the risk/reward over the medium term clearly points to significant higher prices in gold.
Products like The Perth Mint GoldPass have been fortunate enough to have good timing with innovative technology in the sector. Effectively providing investors with the ability to bypass ETFs, and associated costs, and buy gold directly from a provider. In this case, the gold that is held on their behalf (custodied) by The Perth Mint, who has a government guarantee on all assets held for their clients, also offers zero storage fees.
The adoption of these sorts of products, which enable holders to buy, sell, redeem, as well as transfer physical gold, all instantaneously, will continue to see increasing adoption in an inflationary market. If trust erodes around the ability of central banks to manage the economic cycle, and thus the volatility of local currencies then I believe we will see further adoption of gold as both a store of value and potential unit of payment.
About The Author
Jon Deane has an extensive background in the commodities space, spending ten years at JPMorgan as a managing director and as the head of commodities trading in the Asia Pacific region. He is now CEO of InfiniGold.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.