Fed Chair Just Made this Case for Gold

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In addressing the distressed economy, Jerome Powell made the case for more government stimulus. Here’s why one author argues it will be great for gold.

On Wednesday, Federal Reserve Chair Jerome Powell gave a speech addressing the difficulties that surround both the domestic and global economy. As expected, the speech had little optimism to it and immediately pushed the stock market down. In the meantime, gold continued to test new highs, having most recently climbed above $1,750 during Friday’s trading session.

As FXEmpire’s Arkadiusz Sieron notes, the closest to optimism one could glean from the speech was Powell’s reveal that the Fed would keep interest rates in positive territory. Although the chair dismissed the negative interest rates of the European Central Bank and the Bank of Japan as dubious experiments, the fact remains that Treasuries have posted some of their all-time low showings even before the coronavirus.

From there, Powell went to some lengths to detail just how bad the situation has gotten from a purely economic standpoint. The chair noted that lawmakers were not only struck by the magnitude, but also the speed at which the pandemic had engulfed all layers of the economy, likening the crisis to the worst of its kind since World War 2.

What was already a decline in economic activity was greatly aggravated by the coronavirus, with Powell noting that any job gains made over the past decade have been erased. Furthermore, the chair revealed that the pandemic caused a loss of 20 million American jobs in the span of just two months.

The rest of Powell’s speech struck a familiar chord, as the chair warned people not too get overly anxious with expectations of a recovery and warned that a V-shaped recovery, or a quick turnaround, is unlikely. Instead, Powell and his team expect the coming rebound to not only be slow, but riddled with uncertainties.

Addressing government spending, Powell seemed satisfied with the Fed’s lack of hesitation when it came to issuing their trillion-dollar stimulus check. The chair said that the trillions of dollars printed thus far might not be the Fed’s final response on the matter, and that the central bank is open to more stimulus if the need arises.

Likewise, during the speech, Powell appeared to urge Congress to open the door for more fiscal spending. The federal government has already created a massive deficit, moving the budget from a $160 billion surplus in April 2019 to a deficit of $737.9 billion during the same month this year.

Pointing out that the Fed deals more with lending than it does with spending, Powell seemingly wasn’t content with the $2.9 trillion spent on mitigating the effects of the pandemic, believing more support could be in order. In short, the speech at the Peterson Institute for International Economics was one of a contracting economy, uncertain recovery, currency debasement and piled-up debt, all major tailwinds that have kept gold breaching one high after another over the few past weeks.

Gold Stands to Soar in Midst of “The Great Lockdown”

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Global economic growth is projected to fall below -3% this year, and it’s exactly why Frank Holmes argues that more people must own gold. See his argument here.

As Forbes contributor Frank Holmes points out, “The Great Lockdown” isn’t just a colloquialism used to describe the current state of affairs. It is a term that the International Monetary Fund (IMF) itself has come up with to describe the economic picture, along with such dismal outlooks as predicting that the world is headed towards the worst recession since the Great Depression. And, with global economic growth projected to fall below negative 3% this year, they have no shortage of data to back up their forecast.

To Holmes, this is a wake-up call that signals it’s time for every individual to focus on preserving their savings. As evidenced by the action in the gold market so far, plenty of people around the world have indeed recognized this ominous signal. Gold has climbed roughly 13% so far this year and quickly made precious metals one of the best-performing asset classes. A look into this month’s top searches on search engine also shows that gold has piqued more interest than it has at any point over the past decade, including when the metal reached its all-time high of $1,900 in 2011.

With its exceptional performance thus far, many experts and analysts have been calling for prices that even the bullish forecasters wouldn’t have dreamt of a year or two ago. Bloomberg commodity strategist Mike McGlone recently noted that gold seems to be aiming for a reversion of its long-term mean versus the S&P 500 Index, a move driven largely due to the unprecedented amount of monetary stimulus currently taking place. If true, gold would undoubtedly move on to new highs, with Holmes highlighting a range of $2,800 to $3,000 based on the S&P 500’s current mean.

Perhaps the most notable part of this analysis, however, is that a mean reversion of this kind is far from a hypothetical scenario. In May 1990, gold and the S&P 500 were both trading inside a range of 330 to 360. For a more recent example, March 2013 also saw gold and the S&P 500 trade within a 1,500 to 1,600 range, a roughly one-to-one ratio. This makes the scenario of gold climbing to $2,800 and above in the short-term a very realistic possibility backed by historical precedent.

Yet despite the clear flock to gold and extremely bullish indicators such as this, Holmes thinks far too many people remain severely underweight on the metal. A study done by the World Gold Council (WGC) last year showed that commodity indices have a minimal gold weighting, meaning that investors whose exposure through gold comes by way of funds only receive a meager amount of benefits from an outperforming asset.

Instead, Holmes recommends a much more direct approach to owning the metal, one that involves at least a 10% allocation within a portfolio with a sizeable emphasis on physical gold. While some people might feel as if they already missed their entry point due to the strength of gold’s gains so far, Holmes notes that both price forecasts and economic predictions suggest that this is far from the case.

The Simple Reason Gold Fell with Stocks Last Week

Although most assume that gold would have surged, this is not without precedent, with past cases resulting in massive upside for gold prices. See why here.

As the coronavirus crisis worsens throughout China and the rest of the world, the global market has seen its sharpest decline since the 2008 financial crisis. Virtually all equities plunged last week as traders rushed to dump their assets in favor of cash, with the Dow losing as much as 3,600 points within the week.

Some analysts found it curious that gold and silver prices also fell, with the metal dropping from about $1,640 to the $1,560 range during Friday’s trading session. Gold is known for its hedging properties and generally prospers as a consequence of stock selloffs, making the parallel action come off as unusual.

Yet upon closer inspection, one can see that a mutual selloff in both markets is not without precedent, and that similar cases in the past have resulted in massive upside for gold once the dust settled. Last year, much was said about the peculiarity of gold moving up together with stocks, considering the latter are seen as the metal’s biggest competitor. As gold kept climbing, however, it became clear that the metal’s numerous drivers and sturdy fundamentals were powering the gains as opposed to sentiment.

As various experts have explained, the precious metals selloff shouldn’t be of particular concern to gold investors as a massive wave of panic has taken hold of the markets. Peter Spina, president and CEO of GoldSeek.com, pointed out that some of the selling is a result of a general selloff by large funds, which recently increased their positioning in the gold market by a wide margin. Likewise, Peter Grant, vice president of precious metals at Zaner Metals, pointed out that the threat of contagion has significantly hampered physical transactions in China and India, two of the world’s biggest buyers whose bullion investors tend to favor in-person purchases.

Brien Lundin, editor of Gold Newsletter, noted that silver’s decline is also tied to diminished industrial demand, as the coronavirus has impacted both the commodity and energy markets. The already-skewed gold/silver ratio has now climbed above 95, exceeding last year’s peak and nearing its all-time high.

Despite the selling pressure from the past few days, there are good reasons to be excited about gold prices moving forward. Lundin pointed out that this kind of price action is part and parcel of any global crisis, as central banks invariably respond to damaged economies by introducing massive amounts of stimulus. The 2008 financial crisis, which ended up moving gold prices to all-time highs, was an example of investors recognizing that loose central bank policies are causing just as much damage to the economy as the crisis itself.

As in 2008, Lundin expects multiple rate cuts, quantitative easing and increased government spending in response to the crisis. Given gold’s tremendously positive response to successive and unexpected rate cuts in 2019, Lundin predicts that the coronavirus crisis will ultimately prove far more beneficial than detrimental to the precious metals market, adding that prices could retake their upwards trajectory with much greater vigor in the coming weeks and months.

Gold Settings Its Sights on $1,900

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The yellow metal is up about 20% in the last year, but at least one analyst says that it will soon go much higher. Here’s why he thinks it may set a new record.

In a recent interview with Kitco, Peter Reznicek, head trader at ShadowTrader, spoke about the extremely bullish signals that gold has been sending over the past six months. The metal is currently riding on six-year highs, oscillating in a narrow trading range above last year’s high of $1,553.

While the jump of roughly 20% in gold prices over the past year  has enticed many investors, Reznicek says that the price spike is merely the beginning of something very exciting in the market. The veteran trader explained that he favors long-term charts and, when assessing gold, looks as far back as two decades ago to get a better idea of where the metal is headed.

Observing the market from this perspective, Reznicek found it clear that last summer marked a breakout from a prolonged range bound pattern. While some view gold’s retracement from the $1,600 level as a sign that the metal might be moving too fast, Reznicek isn’t the least bit concerned and assures investors that gold is on a clear upwards trajectory.

As Reznicek points out, gold prices soared around mid-2019 before moving sideways over the next couple of months, which is a bullish sign in and of itself. Gold’s strong positioning above last year’s highs suggests that the metal is enjoying excellent support around current levels and could be one or two drivers away from a major breakout.

Reznicek has little doubt that gold bottomed out ahead of the summer price jump and that, from a longer-term perspective, the metal is preparing to shoot far above current levels. Having been bullish on gold for some time, Reznicek unequivocally advised investors that long gold is the position they want to be in right now.

In terms of price levels, Reznicek pointed to $1,613 as the next key resistance level that gold shouldn’t have a hard time breaching. Over a slightly longer period, Reznicek said that gold investors should keep an eye out for the all-time high of $1,900 as a very reachable level, while leaving open the possibility that the metal could end up even higher in the near future. Reznicek’s prediction echoes that of several other guests on Kitco’s show, many of whom are predicting that gold will indeed recapture levels last seen in 2011 and possibly leapfrog them.

Speaking about short-term drivers, Reznicek singled out the coronavirus as a potentially important tailwind for gold. Although the trader feels that the outbreak hasn’t influenced the gold market to a significant degree thus far, he noted that any significant market disruption related to the virus would definitely play into gold’s favor.

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