When The Stock Market Panics, Gold Shines; Is That The Case Right Now?
With the last bout of uncertainty in the market, gold prices have jumped once again this week. The upper end of gold prices saw the precious metal trading at highs of $1,704. 30 per ounce during Monday’s session. While gold is typically looked at as a safe-haven, it hasn’t been a static move up this year.
A Bloomberg article cited Naeem Aslam on the overall performance of gold bullion. “In terms of volatility, it is normal especially when the market is expecting the March Fed meeting to be a live one. The fact that the price has broken the 1700 mark, it leads us to believe that there are strong chances for the price to cross this level again.”
As markets get hit with uncertainty, we see a flight to gold. Both the SPDR Gold Trust ETF (GLD-Free Report) and GraniteShares Gold Trust (BAR-Free Report) reached new highs this week. The latest round of coronavirus concerns set up a perfect storm for a big spike in drama over the weekend. The addition of oil’s drop simply added to the bearish sentiment. On top of this, we have other economic indicators suggesting a longer-term financial risk.
Last week we saw the Federal Reserve implement an emergency rate cut in hopes of boosting things in the economy. While I think this was more of an action to help boost market sentiment, it appeared to have backfired on all accounts.
What’s Next For Gold Prices?
Typically when you have a strong economy, lower interest rates aren’t necessarily a factor. Similarly, we are now seeing bond yields slide as well. Meanwhile, the markets are waiting on both the European Central bank and the Fed to see what happens next to defend inflation expectations.
“It’s routine for the Fed to encourage financial institutions to meet the financial needs of their communities during past government shutdowns and natural disasters, and we are currently considering the best way to do so in this situation,” a spokesperson for the central bank said in a statement.
The Federal Reserve stated that it plans to boost cash on hand, too. The central bank is willing to lend to the market for the “repurchase agreements” in place. This is a temporary exchange of cash for high-quality collateral including government bonds. The primary dealers took advantage of some $112.93 billion in central bank liquidity via the Fed’s repo program. This was up much more than what was sought after on Friday. However, it’s under the recently upsized $150 billion cap that the NY Fed holds on overnight operations.
Is An $1,800 Gold Price In The Cards?
Investors flocked to safe havens all day Monday. This helped push gold to a seven-year high. Additionally, the 10-year Treasury yield dropped to an all-time low of 0.3% during the early morning.
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“We’ve basically lost all our anchors. We lost the economic anchor with the coronavirus. We’ve lost the policy anchor with people losing confidence in the Fed’s ability to turn things around. And over the weekend, we lost a market anchor with OPEC,” Mohamed El-Erian, chief economic advisor at Allianz, said Monday morning on CNBC.
With Wall Street now expecting yet another rate cut, things could get even more “interesting”. How low can they go? Well, after the last drop to a current range of 1% to 1.25%, the anticipation is for a 0% rate. This is a level we haven’t seen since the financial crisis. Given how “strong the economy is,” this can be a bit confusing to some.
The protection in doing this is to levy the potential blowback of the impact that coronavirus cases have had on the global economy, in general. While we still have yet to understand the broad scope, Central Banks are likely to take similar steps to safeguard things in the meantime.
Will gold reach $1,800 next? Another question where time will dictate the results. however, if you look back at the price of gold from the end of 2011 and 2012, you’ll see that the $1,700-$1,730 range was a point of resistance. This came after gold reached all-time highs of $1,923.70. The next level of resistance appears to be at $1,800. It was at these two levels, gold had the hardest time of breaking above during the last big gold rally. Will this time be different?
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