Price of Gold Fundamental Daily Forecast – Federal Reserve: The Gold Investors Best Friend
Gold futures hit a seven-year high on Thursday as another week of massive filings for unemployment benefits and widespread measures by the U.S. Federal Reserve to reinforce the economy strengthened demand for the precious metal as an investment.
The Fed announced as much as $2.3 trillion in additional aid Thursday, including a pledge to provide stimulus to risky areas of the financial markets that have been hit the hardest by the coronavirus pandemic.
Meanwhile, the number of Americans seeking unemployment benefits topped 6 million for a second straight week, with businesses closed across the country in an effort to stem the spread of the virus. That brought the total claims over the past three weeks to more than 16 million. According to CNBC, if you compare those claims to the 151 million people on payrolls in the last monthly employment report, that means the U.S. has lost 10% of the workforce in three weeks.
Driving gold to its highest level since 2012 were investors seeking insurance against the possibility of further economic slowing, even as U.S. equities rose after the Fed moves.
Easier monetary policy and low borrowing costs is what makes gold so attractive as an investment. Gold doesn’t pay interest like bonds or dividends like stocks, so when interest rates move closer to 0% and some companies start reducing or eliminating dividends, gold becomes a more attractive asset.
June Comex gold settled at $1752.80, up $68.50 or +4.07%.
What the Experts are Saying
“Unprecedented monetary and fiscal stimulus, negative yielding debt and low interest rates for longer imply gold will continue to attract a flight to safety and quality,” Suki Cooper, precious metals analyst at Standard Chartered Plc, said in a note.
While I understand the fundamental reasons he is stating, I don’t agree with his conclusion that investors are looking for safety in gold. At a seven year high, investors aren’t looking for safety, they are looking for a return on their investment. Any market that has the capability of swinging 5% to 10% per day in either direction isn’t attractive because of safety or quality. Investors like the upside potential and are willing to manage the risk to get it.
Scarcity Versus the Fed’s Printing Press
For centuries, gold has been one of the most sought after assets because of its scarcity. This factor has been underpinning prices also.
According to Bloomberg, the gap between New York futures and spot prices in London is still elevated, a sign of lingering concern over future supply of the physical form of the metal. While investors continue to demand gold, it’s still difficult to ship bullion around the world due to coronavirus-related restrictions. Liquidity is also relatively thin in the market, further exacerbating the price dislocation.
Meanwhile, the Fed continues to fire up its presses and make as much money as it needs to shore up the economy.
What would you rather own? Something scarce or something abundant? This is actually the core reason for gold’s strength.