Gold’s Big Question: Can the Bull Market Outlive a Pandemic?

(Bloomberg) - Gold's record-breaking bull faces an existential question after this month's pharmaceutical breakthroughs: what happens to the rally when Covid-19 vaccine rollout begins?
Gold is seen by many as the archetypal harbor good, which is inevitably driven up in turbulent times. According to this logic, the beginning of the end of the crisis would mark a turning point for the rally. The precious metal also serves as a hedge against inflation. And given the vast amounts of money flowing into the global economy this year, signs of rising consumer prices could lead investors to return to gold bars.
For much of 2020, gold conditions could hardly have been better as the tide of money pressures, the weaker dollar and global uncertainty fueled demand and drove prices higher. The decline in real US Treasuries sparked steeper gains in July and August, eventually leading to record gold above $ 2,075 an ounce.
How gold's role as a haven through virus turmoil shines: QuickTake
While prices have come down a bit since then, investors continued their rush for exchange-traded funds, which sucked in nearly 900 tons of metal at their peak in October this year, more than double the final inflow in 2019.
Everything changed within a few weeks.
Gold suffered its second largest decline in seven years on the day Pfizer Inc. announced initial results showing its vaccine was 90% effective. Political disputes in the US cast doubts about future incentives. ETFs, which were so important to this year's rally, saw outflows for at least six consecutive days, while hedge funds bullion bets were near their lowest level in 17 months for the week to November 17.
"The strong positive vaccine news suggests a return to normal by spring," said Tai Wong, head of metal derivatives trading at BMO Capital Markets. While low rates and the potential for more government support will "have likely tempered the rate of gold's rise in the short term," he said, boosting bullion will help bullion.
So can the bull market stay alive?
Inflation is going to be key to any outlook now, and it's not the first time. Gold rose to its previous record in 2011, shortly after the financial crisis, when central banks began widespread quantitative easing, sparking fears of German-style Weinar hyperinflation. However, the bulls were disappointed at the time as inflation was kept in check.
This time it could be different, says Oliver Harvey, macro strategist at Deutsche Bank AG.
“When we get out of Covid, there will be an enormous amount of liquidity. The savings rates have gone through the roof because people were stuck at home and still making money, ”he said. "When inflation rises between 3% and 3.5% in developed countries, a lot of people will notice."
Bulls suggest a weaker dollar, which will almost always help gold bars, and central bank action to fuel the economic recovery, which should also be supportive.
"Risks to the gold price remain upward amid expectations of loose monetary policy, with real interest rates remaining low or negative worldwide," said Suki Cooper, precious metals analyst at Standard Chartered Plc. She also sees increased government debt, which will boost inflation expectations.
Also in gold's favor: while prices plummeted on the first Pfizer news, subsequent announcements did not provoke the same sharp reaction and the metal closed shortly after Moderna Inc. news changed on November 16.
Still, the bear camp is undoubtedly growing. The Macquarie Group Ltd. proclaimed the "end of the cyclical bull market" this week and said prices are likely to have peaked.
The bank pointed to the increased likelihood of a vaccine being introduced in the coming months as well as the outlook for higher 10-year Treasury yields, which hit the highest level since March on the first Pfizer announcement.
The prospect of vaccine adoption could also diminish the potential for future government incentives, especially while Senate control is pending.
"It is unlikely, now with a split Senate, that this serious level of government spending will go up," said Darius Tabatabai, head of trading at Arion Investment Management.
Gold can also suffer when investors invest money in other asset classes that can benefit from the recovering economy. And even in a scenario where the dollar continues to weaken or inflation rises, there is still a risk that gold will lose as an investor's hedge against Bitcoin.
If the virus is brought under control and confidence returns, money managers will likely turn towards risk and value, which means "the bull run of gold will end and likely be reversed," said Rhona O'Connell, director of the Market analysis for EMEA and Asia at StoneX Group Inc.
"But the back and forth over the past fortnight is a good reflection of the fact that this is a vaccine, not a cure, and there is still a long way to go before we are out of the woods."
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© 2020 Bloomberg L.P.
In this article
GC = F.
+ 0.44%
ZG = F.
-1.87%
PFE
+ 1.41%

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