Market Overview

9 July 2020

Gold May Repeat the Post-Crisis Path of 2009-2010

Gold has at last successfully passed the psychological mark of $1800 per troy ounce, closing Wednesday's trading at almost $1810/toz. With this effort gold prices confirmed, once again, the scenario with a gradual rise, similar to the dynamics of the bullion immediately after the financial crisis that occurred more than ten years ago. 

The apparent technical similarity of these two post-crisis paths for gold assets became visible at the end of May. The following  picture, illustrates the parallels between gold spot charts in 2018-2020 vs post Global Financial Crisis time. 

Pic.1 Gold Spot in 2018-2020 vs 2005-2009 period

 Source: TeleTrade’s own comparisons

The illustration shows the price areas enclosed in a circle and the oval shape  not only shows a pattern of high volatility of price spikes, but also the principal scheme, where first several spikes were clearly downward and then the spikes shows the recovery in prices. Those movements were preceded by a three-year extreme price growth that was followed by an additional wave of an even faster price growth in 2009-2011. The fundamental reasons behind the movements also seem to have a very similar nature.

The periods of decline in gold prices fully correspond to the areas of primary collapse in stocks, and both of them were caused by substantial profit-taking from the expensive assets, when investors desperately needed cash. That is, most investors were not eager to run away from stocks to gold at the beginning of both crises, or even at the peak of the crisis, contrary to popular opinion. Instead, too-expensive gold was treated as another rather risky asset. But then, gold was enthusiastically bought at about the same time with cheap stocks on the new bottom, which was near $680/toz 12 years ago and around $1450 in 2020. 

During the second stage, which is currently underway, the process of price growth is turning into an upward avalanche as the global financial system is stuffed with trillions in bailout money from the central banks and governments. This is similar to the process of modelling a snowman, when the snowball becomes overgrown quickly with more and more sticky snow. Inflation of the money, nominated in US Dollars, Euro, British Pounds, Aussie, Loonie, etc, manifests itself in a real value growth of most stock assets and of gold assets too, as all of them are measured in increasingly devalued currencies.

Moreover, the inflationary spiral after 2008 did not occur immediately. This time the fall in real income for companies and the population during the virus crisis and quarantine in different countries may limit and delay the future inflation picture for a long time after 2020. So, any further growth of gold prices could be slower during the recovery from the coronacrisis, and it may be even slower now if it were not accompanied by the very fast rate of stock markets' recovery. "The risk of currency debasement may heighten next year, and will show in the value of Japanese yen or gold rather than the dollar," JP Morgan strategists John Normand and Federico Manicardi wrote. A price hike in shares plus a record money influx from central banks may speed up the process and compensate for the lack of money in the hands of the consumers, which could be well managed by portfolio managers.

In addition, gold instruments allow them to re-balance risks in growing portfolios. That is why gold shows the ability to grow to new historical heights simultaneously with stock prices after the last two crises. While the function of possible alternative "escaping from risks" to gold assets from the stocks is to some extent a flimsy argument. Gold itself is now an inherent part of risky assets portfolios. Although gold is less risky, it may also be considered as a safety promising portion in the long run as new detected carriers of the virus appear in different countries. Top U.S. White House pandemic expert Anthony Fauci recently warned that the daily cases growth could even reach 100,000 without proper social-distancing and other safety measures. Some restrictive measures restarted in some regions of Spain, and also in Serbia, with a temporary closed border between Serbia and Greece. All that are not encouraging precedents.

However, the reluctance of portfolio investors to rush to take profits from many overperforming stocks, such as Amazon, Google, Apple, Netflix, and also the Chinese Internet giant Alibaba that joined this list yesterday, is indirect, but quite convincing evidence that the final growth in gold has not been seen. Gold prices may vibrate for some time but it is highly likely that it may be significantly higher than even initial expectations, which were already bold. Gradually growing stock indexes in America and China, or a humbler growth in Europe are also made from the same material that feeds the gold bulls for their daily breakfast, lunch and dinner.

So, the more stable stock indexes are in the face of possible downward corrections, the more often the markets are ready to buy dips instead of more profit taking and selling, the more chances gold prices have to gain a foothold at current levels and to move further up. The total performance of gold during this crisis may even be better than after 2008. At the same time, any possible stock corrections from the current fresh peaks may provoke a temporary strong withdrawal of profits from gold assets, although this is the least likely scenario for the coming weeks.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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