Central Bank and Government Stimulus Measures Push Gold Higher

The Reserve Bank of Australia (RBA) left rates unchanged at 0.25% during their meeting yesterday.

The bank said they thought their mid-March support package was doing its job and that the economy was working with a high level of liquidity.

There is certainly still liquidity out there

You can see it in the stock market. I mean the S&P/ASX 200 is trading at levels similar to February last year, even though we are fighting a pandemic and Victoria is in another lockdown.

According to CoreLogichouse prices fell 0.6% nationwide in July with both Sydney and Melbourne prices falling around 1%. But considering the housing market has been driven by investors and high immigration, it’s likely it could have been a lot worse if not for JobKeeper and mortgage deferrals.

The RBA has also said they will be buying more government bonds to keep interest rates low and that ‘further purchases will be undertaken as necessary.

Whether recovery picks up or there are more lockdowns, the scenario for inflation is the same. They expect it to stay below 2% over the next couple of years, to average between 1 and 1.5%.

On the other side of the globe, the US Federal Reserve is also looking at keeping rates low at 0–0.25%.

Gold is a fear trade because it’s seen as a safe haven. But gold also turns attractive when real interest rates turn negative (real interest rates are the nominal interest rates minus the inflation rate).

Gold breaks a new high

We have no idea how all these central bank and government measures will play out in the long run…but so far, it’s been good for precious metals like gold and silver.

At time of writing, gold has broken upwards of US$2,023 an ounce, gaining a return of close to 33% for the year.

In Australian dollars gold is trading at $2,813 an ounce and has recorded a 30% year-to-date return.

According to data from the World Gold Council, demand for gold-backed ETFs in the second quarter of this year saw huge inflows:

The global response to the pandemic by central banks and governments, in the form of rate cuts and massive liquidity injections, fuelled record flows of 734t into gold-backed ETFs (gold ETFs). These flows helped lift the gold price, which gained 17% in US dollar terms over the first half, hitting record highs in many other currencies.

Silver is also seen as a safe haven and has returned over 120% since its March lows.

One way to get exposure to this gold rally is through physical gold. The other is through gold stocks, but it’s not easy to pick the winners. For some guidance, you can check out Greg Canavan’s report ‘How to Pick Winning Gold Stocks’.

You can access this free report click here.


Selva Freigedo

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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