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Analysts see government stimulus driving gold higher

Despite a gloomy economic outlook, the price of gold recently rose to over US$1,700 per ounce with analysts forecasting it would continue to rise as governments and central banks lever stimulus to lessen the economic toll of the new coronavirus.

Year-to-date, the price of gold has climbed about 12.9%, outperforming industrial commodities and broader markets that have suffered heavily in the wake of the pandemic.

Saxo Bank A/S analyst Ole Hansen said in an April 16 note that the move over US$1,700/oz put gold at a seven-year high, with investors turning to exchange-traded funds in force. "Despite having seen the rally pause above US$1,700/oz the demand for gold through ETFs has continued with total holdings reaching a record 2,922 tonnes, up some 345 tonnes so far in 2020," Hansen said.

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Hansen expects stimulus measures, such as the US$2.2 trillion relief package in the U.S., to support the price of gold in the longer term given the expectation that interest rates will remain low.

"Despite the need to consolidate, and with that the risk of another mini correction, our long-term view remains firmly bullish," Hansen said. "The level of stimulus currently going into the global economy is likely to support gold over the coming years with yield curve controls likely to push real yields deeper into negative territory."

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As economic challenges mount, Goldman Sachs and UBS recently increased their gold price forecast to US$1,800/oz. Analysts also said it was possible that the price of gold, fueled by a weaker dollar and recessions, could rise higher still, possibly breaking records.

Desjardins Capital Markets analyst David Stewart noted that gold has not responded to the extent it did during the 2008-2009 financial crisis when the Federal Reserve pursued quantitative easing to bolster the U.S. economy, while the global scope and size of financial packages now being proposed are greater.

"From QE1 to QE2, gold increased 64% from US$821/oz to US$1,349/oz," Stewart told S&P Global Market Intelligence. "From QE1 to QE3, gold increased 115% from US$821/oz to US$1,767/oz. With gold at US$1,553/oz last month when QE infinity was announced, a similar performance to the last cycle (QE1-QE2) would see gold increase to US$2,550/oz, and if compared to the full cycle (QE1-QE3) then gold would increase to over US$3,300/oz."

" If you mentioned those numbers even six months ago you'd be laughed out of the room," Stewart added, but more generalist investors have become less skeptical of the potential for record prices. "Now you hear US$2,000/oz gold come up in a lot of conversations and not with the usual suspects," the analyst said. "It will be very interesting to see what happens to gold in the near term."

Likewise, Bloomberg Intelligence analyst Mike McGlone pointed to gold's price action as muted compared to its performance during past crises. Stimulus measures would continue to be a "worthy catalyst" for gold, McGlone said.

"Compared with the aftermath of the 2008 financial crisis, when gold rallied about 170% to US$1,900 in 2011 from a low of about US$700, a 70% advance on the back of the coronavirus-related global recession seems tame," McGlone said in an April 14 note. "The financial crisis was U.S.-centric vs. the worldwide scope of the current and potentially more enduring economic calamity."