Competing Visions on the Gold Price Outlook: Why Currency Could Be Key

US shares have tumbled again overnight, as a collapse in US oil prices and glum forecasts by companies worsened fears of a deep economic downturn.

The Aussie benchmark ASX 200 [XJO] has opened in the red following the lead of Wall Street.

This week has been a sea of poor economic indicators.

The ABS released data on Tuesday revealing the number of Aussies in a job has fallen by 6% since the coronavirus crisis.

The price of gold is still showing signs of uncertainty as it battles for haven status with the USD and yen.

What is the outlook for the gold price?

Today, two competing visions of gold’s future have emerged.

With one predicting giddying heights and the other foreseeing a return in demand for risky assets.

Gold Price vs AUD vs USD Price Chart


The end of the gold price bull or just the beginning?

Before we get into it, look at the graph above.

It is a comparison of the current USD spot price (yellow) of gold versus the AUD spot price (green) since the beginning of the year.

And the black line tracks the AUD/USD exchange rate.

I think an interesting trend is emerging.

Bloomberg reported that Bank of America raised its 18-month gold price target to US$3,000 per ounce.

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A target more than 50% above the existing price record.

The bank said it increased its previous target of US$2,000, as policy makers across the globe unleash vast amounts of fiscal and monetary stimulus.

With spot prices up around 11% this year, BofA said its new target is based on the extraordinary scale of current financial repression.

On the contrary, London-based consultancy firm Capital Economics said a deflationary environment and the slowing spread of COVID-19 will likely see demand for safe haven assets wane.

It is hard to disagree with them too.

The main drivers of gold prices of late, a flight to safety following a crash in the equities market, and massive monetary stimulus could begin to lose relevance as market fears subside.

With interest rates close to their effective lower bound, deflation is likely to push investors towards assets with fixed nominal yields, such as US Treasuries, and away from gold,’ Capital Economics said.

Although, the one thing BofA and Capital Economics seem to be in agreeance on is the end-of-year price of gold.

Both estimate bullion to average around US$1,600–1,695 an ounce.

Who has it right on the gold price?

Both parties have compelling arguments.

With the massive amounts of stimulus devaluing currencies, it is easy to believe gold can still push higher.

While fear stemming form COVID-19 is probably easing, it’s not surprising demand is returning for riskier assets.

My gut tells me we haven’t seen the return of risk assets just yet.

Remember, many US blue chips have yet to release COVID-19 era earnings. And I don’t think the expectations on these earnings are fully priced in just yet.

So let’s look at gold in AUD terms.

Our chart above shows that around the beginning of March, the AUD/USD exchange rate became closely correlated with the USD spot price.

The Aussie spot price, on the other hand, diverged and continued pushing higher.

What this means is, if we continue to see a suppressed Aussie Dollar, the gold price in AUD terms could continue to strengthen — even if demand returns to the equities markets.

With falling interest rates and commodity prices, demand for AUD could stay low for some time.

If further interest rate cuts are on the cards and huge amounts of stimulus begin to flood the Aussie markets, now could be the right time to invest in gold.

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Kind regards,

Lachlann Tierney,
For The Daily Reckoning Australia

Lachlann Tierney is a writer for The Rum Rebellion and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. 

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