Gold prices have soared this year, and some experts think they could eventually pass the all-time high north of $1,900 an ounce.
“If everything stays the status quo, there are significant tailwinds for gold,” said Michael Ponikiewicz, a portfolio manager with Acadian Asset Management.
Gold is seen as a safer, steadier place to park money in times of turmoil, and its strong performance this year is in stark contrast to the broader stock market: Gold prices are now up nearly 15% in 2020, while the Dow is down 15% and the S&P 500 has fallen nearly 10%. (The tech stock-infused Nasdaq is up more than 2%, however.)
The monetary policies enacted in response to the pandemic have also pushed gold higher.
The Federal Reserve has cut interest rates to zero, likely for the foreseeable future. Fed chair Jerome Powell has also strongly suggested that more monetary stimulus could be on the way, which could eventually weaken the dollar and boost inflation pressures – and that would be bullish for gold. (Bitcoin bulls are making a similar argument.)
The desire for safer investments could push gold higher
No one knows for sure when the coronavirus pandemic – or its effects on the economy – will wane. Experts say that continued global uncertainty, coupled with corporate earnings that are expected to plunge for the remainder of the year, will continue to boost gold.
After all, Ponikiewicz noted, gold is more attractive right now than another major asset that’s usually popular in uncertain times: long-term bonds. Those yields have plunged due to coronavirus concerns, with the US 10-Year bond standing at just 0.7%.
With all of the demand for gold, investors have poured money into gold-backed exchange-traded funds like the SPDR Gold Shares (GLD).
It’s eerily similar to how gold behaved during the Great Recession, says Steven Dunn, head of ETFs at Aberdeen Standard Investments.
Gold plunged in the immediate aftermath of the bankruptcy of Lehman Brothers as fears about the Global Financial Crisis roiled all markets. But once the panic selling subsided in 2008, gold then took off on an epic rally that culminated in its all-time high in 2011.
Dunn thinks history could repeat itself.
“There are tremendous parallels to 2008. Gold sold off at first because it’s a liquid market and it’s a good thing to sell in order to raise cash,” Dunn said. “But when you look at all the global stimulus and economic unknowns, it’s a perfect recipe for gold.”
Dunn, whose firm runs the Aberdeen Standard Gold ETF Trust (SGOL), thinks gold could be propped up by more bleak data, including a wave of bankruptcies. This will probably lead to further economic aid packages from both the Fed and Congress, which should lift gold prices even higher.
“There is still a lot of bad corporate news to come,” Dunn said. “The outlook for gold is still strong with all these unknowns.”
Too far too fast?
Still, there are some potential risks for gold in 2020.
Prices could suffer if the recent stock market rebound picks up steam, on hopes that the global economy – and corporate profits – may bounce back more rapidly than previously expected.
There’s also the fact that gold is not just an investment. It’s a physical good that has some industrial uses and is also a key component in luxury items like rings and necklaces.
And in a downturn, few are feeling particularly luxe. The World Gold Council said that demand for gold jewelry plummeted nearly 40% in the first quarter compared to a year ago, while demand from technology companies using gold fell 8%.
A relatively strong dollar could also limit gold’s upside. Historically, gold prices tend to thrive during times of dollar weakness. But the US Dollar Index is currently up about 4% this year.
Some experts think the dollar will inevitably weaken as the Fed continues to print money and the Trump administration and Congress could seek to spend even more on bailout programs.
“The dollar is doing better than other currencies right now, but it could pull back as people fear inflation from printing trillions of dollars,” said Ed Moy, a strategic advisor to gold bar producer Valaurum and a former director of the US Mint.