Investors pile into gold

The gold price is poised to hit an all-time high, amid growing expectations that the Federal Reserve will put a cap on US interest rates to stimulate its economy. 

This week, the price traded at $1,800 an ounce, against a record $1,896 struck in September 2011.  It was $1,290, on 2 May 2019, when Family Capital pointed to purchases by the central banks as a bullish indicator.

The central banks have remained net buyers ever since although they fell in number in the first quarter. The Russian central bank said it would suspend its gold purchases in April, possibly due to a drop in oil revenues.

Gold purchases by investors have been behind a price rise of 17% this year, amid the Covid-19 pandemic, against a -5.5% loss for US stocks. In value terms, gold-backed ETFs rose in value by a record $23 billion in the quarter.  

Hedge fund manager John Paulson has benefited hugely, as one of the world’s biggest investors in gold and mining stocks since the 2008 credit crisis. Paulson has just confirmed that he will convert his $9 billion hedge fund into a family office.

The gold price is buoyant when low yields offer little incentive for investors to put their money in bonds or bank accounts. Gold also benefits during periods of low-interest rates when inflation expectations are rising and the dollar is falling. 

More than half of economists recently polled by Bloomberg say the US Federal Reserve will keep a tight lid on bond returns through a measure known as yield curve control.

This strategy would see the Fed using bond purchases to cap yields on certain maturities at a specific level. 

This move was initiated by the Bank of Japan four years ago, as it fought to free its economy from a 20-year deflationary spiral.  

Australia adopted its own version of the policy this year. Traders say India has adopted the strategy informally. 

A recent fall in yields for five and ten-year Treasury bonds suggests the market is bracing itself for the yield control. Fresh Covid-19 outbreaks in part of the US, plus corporate collapses, have helped fuel this expectation although some argue the recent economic recovery has been sharp enough to postpone the strategy. 

Analysts believe that yield curve control could spark a “buy everything” rally for credit, equities, gold and emerging markets, although gold is perceived as a prime beneficiary.

This would be due to dollar weakness and economic uncertainty hurting the other asset classes.

Goldman Sachs has raised its gold price forecast to $2,000 an ounce saying consumers in emerging markets could afford to lift purchases, if the dollar stays low. Bank of America is forecasting gold hitting $3000 an ounce. 

Thomas Puppendahl, founder of Singapore-based Chancery Asset Management, says gold will hit $5,000 as inflation rises: “Gold needed a black swan event to launch the next bull market. 

Everything has come together now. We are seeing governments going in hyper overdrive and printing even more money and central banks calling on governments to implement fiscal stimulus.”