By Giles Coghlan, Chief Currency Analyst at HYCM
Gold in focus
The strength of the recovery from COVID-19 lows across global stock markets has been a surprise to many. Although central banks around the world have stepped in with monetary policy action and govt’s have implemented fiscal stimulus wider questions remain. Will Q2 earnings disappoint? Was it mainly uninformed retail traders who fuelled this recent stock rally. Social distancing measures are expected to limit customer numbers (and profits) until a vaccine has been found.
The most obvious question is how will earnings recover in COVID-19 viral landscape. Indeed, are we even in a post-viral landscape? Gold has hit a one month high this morning as rising US COVID-19 cases raise concerns over a swift economic recovery.
Private banks advising clients to hold gold
According to Reuters most private banks usually advise clients to hold no or virtually no gold. Now, some banks are reportedly advising clients to hold up to 10% of their portfolio in gold. This is due to the high levels of stimulus which is forcing bond yields lower. As central banks purchase bonds, the price is kept high, the yield lows. This in turn keeps the countries interest rates low and makes non-yielding gold more attractive. As cash is devalued by banks QE programmes then gold gains in appeal.
Gold further to run?
Since the start of the year gold has run more than 12% and many analysts still see $1800 as the next target for gold. Reuters spoke to 9 private banks overseeing $6 trillion in assets of the world’s ultra-rich and they had all advised clients to increase their gold holdings. It is worth noting that if we see equity markets falling further it would potentially have a disproportionate impact in gold upside. Bond and equity markets have an estimated $200 trillion value while the smaller gold market is estimated to be less than $5 trillion.
The most common way to benefit from a potential self-fulfilling prophecy (after all if everyone is expecting gold to rise then it will) on gold’s rise is from a choice of four. Gold mining companies, index funds tracking gold, derivatives such as options and futures, and gold itself in the form of bars or coins. Here is a look at the XAUUSD gold chart with major support levels marked where medium term buyers could find value.