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Mark O' Donnell
 · 
Research Analyst
May 15, 2020
 · 

Gold may see $1,800 if there is a second wave

Gold may see $1,800 if there is a second wave

Gold has been rallying in the past couple of days as stocks dip. Threats of a second wave hitting the western countries alongside fears extraordinary quantitative easing will devalue significant currencies have traders and investors seeking refuge.

Gold has been outperforming bonds as the safe ballast as of lately with the Coronavirus pandemic ravaging economies all around the world. To South Korea shutting nightclubs to China, ushering in new restrictions, a second wave hitting Asia is spooking market participants. It is a reminder to many countries coming out of lockdown that the real test has yet to come.

Gold has been rallying in the past three days edging closer to that psychological $1750 mark. This mark has been tested in the past two months, but bulls cannot fully break past it. Unlike oil, there have been many investors turning to physical Gold as a storage of wealth. Due to travel restrictions, Gold has been fighting COVID kits for space on planes due to hedge funds and investments in Gold ETFs craving this age-old storage of wealth. However, hedge funds have been touting a more fundamental reason as to why they believe Gold will increase in value – fears that extraordinary quantitative easing (QE) will devalue significant currencies.

Paul Singer's Elliot Management told his investors that Gold was "one of the most undervalued" assets and that its fair value was "multiples of its current price", citing "fanatical debasement of money by all the world's central banks" and low-interest rates. Has this been the case in past recessionary periods?

Less Quicker Maths

We can take a look at 3 significant instances where central banks implemented quantitative easing: Bank of Japan in 1997, The Federal Reserve in 2009, and the European Central Bank in 2015. For each case, I took the currency that the central bank was situated and paired it with a currency that was not implementing quantitative easing. I took the returns of the currency pair against the returns of Gold a year after the central bank implemented quantitative easing, and attempted to see whether there was a correlation between the two.

Year/Country Currency Pair Correlation
Bank of Japan, 1997 USD/YEN -.50
Federal Reserve, 2009 USD/GBP -.64
European Central Bank, 2015 USD/EUR -.53

The results show that there was a negative correlation between the returns of the currency and the returns of Gold ie. As the currency of the country that was implementing quantitative easing depreciated, the value of Gold appreciated. Suffice to say; these hedge funds may be onto something.

However, a breach of $1,800 may require both a second wave alongside central banks' quantitative easing. But a second wave may wreak havoc in other parts of the market, making a break to the upside in Gold possibly redundant.

Anish Lal did some great technical analysis Gold. You can watch it here.

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