Wednesday, April 22, 2020
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‘The Fed can’t print gold’
The economic response to the coronavirus has been unprecedented.
From record drops in consumer spending, to expectations of a record decline in GDP growth, and a never-before-seen explosion in support from fiscal and monetary authorities, we are in a truly unparalleled environment for investors.
And amid these newfound challenges, strategists at Bank of America Global Research think the case has strengthened for the oldest safe haven in the book: gold.
“As the ultimate store of value, gold prices have performed well during the past 15 months, posting a rally of over 10% since the Federal Reserve did a monetary policy U-turn in January 2019,” write strategists led by Michael Widmer.
“The size of major central bank balance sheets has been stable at around 25% of GDP for the last decade or so, just like the gold price,” the firm adds.
“As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure. And investors will aim for gold. Hence, we mark-to-market our forecasts and now project an average gold price of $1,695/oz in 2020 and $2,063/oz in 2021… we have also decided to up our [18 month] gold target from $2,000 to $3,000/oz.” (Emphasis added.)
The case for the yellow metal from BofA is straightforward — investors seeking protection from an economic downturn and a targeted reflation of the economy via fiscal and monetary stimulus will turn to gold for safety.
Or as BofA writes: “The Fed can’t print gold.”
Now, the gold trade has had its ups and downs over the years, but proved resilient during a strong stock market run in 2019 and has weathered the coronavirus chaos quite well. Indeed, only long-dated U.S. Treasuries have kept up with gold as successful safe haven trades this year.
BofA notes that factors such as a strong US dollar, continued market volatility, and decreasing demand from emerging market buyers could also weigh on gold. A poll from Reuters published Monday indicates traders see gold trading lower on these concerns this year and next.
BofA also notes that a spread between the paper and physical contract widened in early April on concerns over global gold production and the inability for some buyers to take delivery. And while these spreads have narrowed in recent days, the blowout in oil seen this week is a reminder that physical settlement of commodities can in extremely rare instances cause chaos in the market.
DoubleLine CEO Jeffrey Gundlach tweeted Monday that he foresees a similar, but opposite, dynamic potentially playing out in gold — demands for physical delivery corresponding with no bullion available to deliver.
I spoke about how physical gold is far better that “paper gold” for the opposite but related reason that tanked May WTI today. What if the “paper gold” vehicles wanted to take delivery of their futures and the counter party couldn’t deliver?
— Jeffrey Gundlach (@TruthGundlach) April 20, 2020
In late 2019, we highlighted work from Goldman Sachs that indicated a preference for physical gold among investors seeking to stable stores of value for their wealth. In that note, Goldman strategists forecasted the gold price would rise to $1,600 by 2020. Of course, in December no strategists were baking a global recession into their forecasts for this year.
As of Tuesday, an ounce of gold was trading just below $1,700.
And in an environment where fiscal and monetary authorities around the world appear ready to do whatever it takes to get businesses and consumers back on their feet after a forced stoppage of economic activity, BofA writes that “a lot of risks could effectively be socialized, boosting the appeal of gold.”
So far, so good.
What to watch today
7 a.m. ET: MBA Mortgage Applications, week ended April 17 (7.3% prior)
9 a.m. ET: FHFA House Price Index month-on-month, February (+0.4% expected, +0.3% in January)
6:50 a.m. ET: AT&T (T) is expected to report adjusted earnings of 84 cents per share on $43.99 billion
7 a.m. ET: Delta (DAL) is expected to report an adjusted loss per share of 87 cents on $9.19 billion in revenue
Other notable reports: Kimberly-Clark (KMB), Biogen (BIIB)
Notable reports: O’Reilly Automotive (OLRY), CSX (CSX), Las Vegas Sands (LVS)
Brent crude hits 1999 lows as oil prices continue to fall [Yahoo Finance UK]
Senate approves $500B virus aid deal; sends to House [AP]
What’s in the deal to protect small business from coronavirus fallout [Yahoo Finance]
Netflix adds 15.7 million global users in Q1 2020 amid coronavirus pandemic [Yahoo Finance]
Snap 1Q daily active users, revenue top expectations [Yahoo Finance]
Chipotle reports strong Q1 sales, withdraws guidance [Yahoo Finance]
YAHOO FINANCE HIGHLIGHTS
China ‘the biggest winner’ of coronavirus-inspired oil plunge
David Zervos: Fed’s coronavirus response left mortgage market ‘high and dry’
Trump is out-of-step with voters on immigration
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