Gold is up nearly 3% in the past couple of days as President Donald Trump's hospitalization due to him contracting the Coronavirus shook the markets. Like many times this year, Gold has been an anchor on volatility, providing stability in a portfolio when markets dive. However, what about the factors that are usually discussed to propel Gold past its previous highs?
We talked about the tailwinds for Gold previously; its link with inflation, dollar devaluation, future volatility, and positive sentiment. Are we starting to see these catalysts come into fruition?
In short, people believe that Gold is a good hedge for inflation instead of holding the U.S. dollar or U.S. denominated bonds. This because Gold is said to hold value better than the U.S. dollar does in inflationary periods.
In the past ten years, we saw inflation fluctuate between 1.5% and 2.5% as the Fed attempted to maintain its mandate of 2% inflation each year. However, with the Fed's new "tool," allowing inflation to hover above their 2%, investors and traders are looking out for inflation to creep up in the future slowly. Furthermore, the Federal Reserve's balance sheet continues to creep up, with them vowing to use all their tools at their disposal to spur the American economy, has the implicit consequence of producing inflation.
So far, we've seen inflation come up from its March lows when the Coronavirus started to hit the economy. It is currently sitting at around 1.7%, from 1.2% in March.
Are we starting to see the catalyst for inflation for Gold? In the current environment, No. Economic activity would need to pick up to relatively normal levels for inflation to spike. However, once a vaccine is on the Horizon, be prepared to look at this catalyst repeatedly.
On the face of it, the dollar index is only down around 3.2%. However, from its March Highs, the Dollar Index is down around 8.8%.
Ever since the Dot Com Bubble, we've seen the Dollar lose over 40% of its value between 2002 and the Global Financial Crisis in 2009. Ever since then, it has never regained the highs seen in 2002 since. Analysts believe if the Federal Reserve continues to prop up the economy with unprecedented quantitative easing and low rates, we may see the Dollar hit levels similar to that in 2009, down around 30% from current levels.
Interestingly enough, attention has been placed on the Federal Reserve on the devaluation of the Dollar. However, there have been many macroenvironmental factors pre-Coronavirus that have been headwinds for any appreciation of the Dollar, such as the historically low-interest rate incentivizing spending instead of saving, and public debt continuing to skyrocket.
We experienced a devaluation of a similar magnitude between the 1970s and 1985, and between 2002 and 2009, where the dollar index fell double digits. However, current saving rates and public debt were relatively higher than what it currently is.
Are we starting to see the catalyst for the devaluation of the U.S. dollar for Gold? Most likely. The pre-Coronavirus factors have been weighing on the Dollar's firm valuation – The Fed's stimulus may be the nail in the coffin.
Oh yes sir boy – with the Coronavirus showing that it does not discriminate after it infected the President of the United States and multiple world leaders in the past year, markets have been all over the show. For example, in the past two days, Brent Crude has experienced wild swings, down 5% yesterday, and now up 6% today.
With the elections coming into swing, alongside Coronavirus shocks just like the one we had with President Trump, are we starting to see the Catalyst of Volatility for Gold? Most certainly. If this is your premise for going long Gold, this may be the optimal time to enter that trade.
Over the past year, we've seen a legendary Gold bull run, primarily due to investors and traders looking at historical tailwinds for Gold and identifying that those factors may be on the Horizon. Furthermore, the barrier to entry for trading investing for retail traders has become non-existent due to the recent "game-ification" of the investing and trading world. Therefore, an influx of retail money has plowed in Gold-Backed ETF" s in the past year, pushing the yellow metal prices higher.
Are we starting to see the catalyst of positive sentiment for Gold? Well, we have already seen it. Since the start of the Coronavirus, there has been much love of the yellow metal. And it seems like that love is still there, so we can say that Gold's catalyst is still ongoing.
With not many headwinds for Gold, and a multitude of future and ongoing tailwinds, this is something you should be keeping an eye on.