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Gold takes a breather, market predicts higher prices

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Gold takes a breather, market predicts higher prices

Highlights

Most expect gold to bound towards end-2020

ETF holdings continue to build

Market frets over mounting central government debt

London — The gold price is taking a breather, with eyes on what it will take to propel the metal higher as investors move money into riskier asset classes, sources said June 4.

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Gold had been on a stellar run higher throughout 2020, bolstered by the coronavirus pandemic and associated panic as allocations moved into safe-havens. However, since countries have started to ease lockdown measures, and some form of new normality has emerged, traders have been parking their money elsewhere.

Still, the move is leaving some scratching their heads, as central governments pile on debt in the form of a tsunami of fiscal stimulus.

"It's all nonsensical. Equities are way out of line with reality. People are way too bullish. The streets are burning, the general public is frazzled by it all. From where I sit it will have to blow up, and that will be good for gold," said one trader, advising to buy any dips.

Talking to S&P Global Platts, Mark Bristow, CEO of gold major Barrick, said that the massive stimulus coming from governments was worrying, and was supporting an elevated gold price at a time production is going down. "We are headed for an unprecedented recession [in my view]," he said.

Indigo Ellis, senior analyst and head of Africa research, at Verisk Maplecroft, told Platts that the sheer volume of fiscal stimulus raises alarm bells of deeper issues further down the line, as sovereign debt balloons. "Across the world debt issuance is astonishing," she said.

Theoretically all of this should be bullish for gold. However, during the pandemic gold has traded in a variety of uncharacteristic ways -- sometimes in lockstep with equities, sometimes with the dollar, mainly with sentiment.

Elusive kick-start

"A kick-start to another rally in the gold price remains elusive. The market's confidence that the most acute stage of the pandemic has passed in many countries has seen risk appetite improve, with investors now betting stimulus measures will bridge the gap to more normal growth. Nevertheless, we still expect gold to hit a record high in H2 2020," argued ANZ in its research Thursday.

The gold price had a solid start to the year. Speculative net-long positions hit record highs, while holdings of gold-backed ETFs surged. However, an increase in risk appetite has been a strengthening headwind for gold.

According to new World Gold Council data, gold-backed ETF inflows over the last five months outpaced records for any whole calendar year, hitting record asset under management highs of $195 billion.

"We remain bullish over the medium term. The macro backdrop is challenging, despite market confidence in the trend towards normalized growth. The expansion of central banks' balance sheets shows no sign of abating, while geopolitical tensions escalate. We think those investors who continue to raise their allocation to precious metals are sitting on a gold mine," the ANZ added.

Investment bank JP Morgan agreed, that warning signs are mounting, and should be bullish gold into the second half. The bank also said that, for the near-term, the current bull-run in equity markets will likely remain.

"Not only is gold likely to benefit from central bank liquidity injections, but it also offers exposure to a weaker dollar and should provide a hedge to some of the downside risks [including US/China trade tensions and civil unrest in the US]," the bank said.

Most expect higher

The overall consensus is that deeper into 2020 gold will make fresh gains, as data compounds what many are fearing. Any recovery from the pandemic will take longer than equity markets are pricing in.

Standard Chartered precious metals analyst Suki Cooper expects gold to average $1,700/oz in Q3-2020 as the risk-on appetite weighs on prices amid weaker-than-expected physical demand during the seasonally slow period for consumption, "but beyond near-term weakness, price risk remains skewed to the upside."

On the matter of flaky economic data, unemployment data out of the US June 4 showed that the economy isn't rehiring as quickly as hoped.

"US initial jobless claims fell to 1.9 million but the key continuing claims number rose 650,000 from last week to 21.5 million, which was ahead of expectations. It's a worry that we are not seeing this number coming down as it suggests employers are not calling their staff back as quickly as had been hoped," argued Neil Wilson, analyst at Markets.com

Geordie Wilkes, head of research at brokerage Sucden, said on a recent conference call that 2020 should be a solid year for bullion. He like the rest said that physical demand will remain muted, and that moves higher will be financial or speculative driven. He noted one headwind could come in the near-term as some optimism of a move out of global lockdown buoys risk-on trade. However, he noted that as the global recession takes hold and data sets continue to disappoint then the bullish case for gold will re-emerge.

Gold was spot bid around $1,710/oz at 1500 GMT June 4. Gold started 2020 around $1,515/oz, and touched a year-to-date high of around $1,765/oz in May.