The gold price has dipped and surged since the onset of the coronavirus crisis, but although the swings have been wide, theyve never been so large as to be beyond the bounds of the rational.
On the contrary, there are good reasons for thinking the price strength is going to continue, according to recent commentary from investment manager Baker Steel, which runs a listed investment vehicle, the Baker Steel Resources Trust Ltd (LON:BSRT).
Amongst other things that Baker Steel points out in a note entitled “Post COVID-19: debt-fuelled stimulus and new highs for gold is that so far there has been US$8tn of economic stimulus in response to the coronavirus crisis.
And while that stimulus may very well help get economies moving internationally it will also likely have significant side effects too. One is that while debt issuance is increasing, interest rates are flatlining or turning negative, meaning that returns on cash, or cash-backed instruments are now no more attractive than gold. In the case of negative interest rates, as already prevalent in some European debt instruments, including a recent issuance of UK gilts, gold will outperform even if the price stays the same.
But theres more.
The increase in the amount of actual money means that it will be less scarce and by consequence less valuable. Gold is attractive in such circumstances precisely because it is impossible to manipulate in the way that central banks are now manipulating currencies. So, gold is a hedge against quantitative easing for the global investment community much as it was post the 2008 crisis.
And its not just physical gold.
“Many gold mining companies are well positioned to capitalise on the strong outlook for gold prices, following several years of reforms and a focus on disciplined returns,” says Baker Steel.
“As a result, margins are already expanding, and many companies are significantly increasing dividends and share buybacks, making the sector more attractive than it has been for a long time. With the gold price still some way below its previous high, there is substantial upside potential in the months and years aheadRead More – Source