Are Gold Stocks Back In Favor With Market Bulls?
For the most part, gold futures pushed higher on Wednesday after suffering earlier losses during the morning. Federal Reserve Chairman Jerome Powell gave comments today stating the central bank would look to use quantitative easing against an economic downturn. In this instance, the bank would purchase bonds in order to pump money into the financial system. Usually regarded as a last resort, quantitative easing focuses on stimulating spending when interest rates fail to work.
In any case, this helped give gold and gold stocks a boost late in the trading day. Metals and mining stocks had previously been trading sideways or lower amid reports of the coronavirus spread slowing. There have been counter reports from fringe websites suggesting that the slow-down may be under-reported. However, no major news outlets have confirmed the speculation.
In any case, Power testified before the Senate Banking Committee. Accordingly, he said that the Fed would use the bond purchases, and communicate clearly with markets about rate policy. Known as “forward guidance,” this is another tool to push back against a potential economic downturn.
Powell Powers Gold Stocks To Rally
Quantitative easing tends to put some pressure on the dollar. Since gold is usually a hedge against inflation, prices benefited following Powell’s comments. Despite gold losing some of its steam this year compared to last, the overall trend is still intact. It has now been more nearly 2 months since the price of gold was below $1,500/ounce.
But with China’s National Health Commission saying that 2,015 new cases of what’s now being called COVID-19, were reported in the last 24 hours, this signified slowing of the spread of the virus. Daniel Briesemann, an analyst at Commerzbank, said in a note that “the virus is having a noticeable impact on physical gold demand. There, as well as in Hong Kong, many jewelers are shut because gold buyers are staying at home to avoid infection and are reducing their spending to the bare essentials.”
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Looking At Gold Stocks Ahead Of 2020 Election
As Ray Dalio recently stated in an interview, investors could be keen to look beyond the next 12 months. In the short term, it appears as though Powell is content with the current state of things. We’ve got employment gains and a strong economy in the U.S. However, current valuations of stocks could be a bit extended.
Some may suggest that a correction could be in the works. But again, in the short term, stocks continue to make new highs.
“Do I think the market is extended and could use a correction? Yes, absolutely. The equity markets have some legs, probably through spring and then I would be a bit more concerned about the strength of the rally, especially coming into an election year.”
Peter Hug, Global Trading Director of Kitco Metals
The jury is still out on the matter of rates. Powell says there’s less room to cut. Meanwhile, President Trump has pushed for negative rates. In the interim, U.S. national debt is sitting at $23 trillion. Though some exports disregard this figure, Powell appeared to have a different reaction. When asked what level would be concerning, his response, “I would be concerned now.”
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