Why Gold’s Biggest Quarterly Drop in 4 Years Doesn’t Mark the End of Its Bull Cycle

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After suffering its biggest quarterly loss since 2016, gold remains one of the few commodities to trade lower this year, but prices still have room to rise even if the global economy continues to recover and the pandemic approaches. its end. “Gold has played its typical role as insurance against market disruption and as a safe haven asset,” says Frederic Panizzutti, head of central bank and institutional sales at precious metals trader and refiner MKS.

“Over the course of the last year, markets had little visibility” around the Covid-19 crisis and didn’t know when a vaccine would be available or how long the closures or cross-border travel restrictions would last, he says. “In a context of uncertainty, the market needed some kind of financial anchor, a safe haven, and gold seemed to be the answer.” GC00 gold futures, + 0.90% GCM21, + 0.90% gained nearly 25% in 2020, their biggest annual gain in a decade. So far this year, the metal is trading around 8% lower, after losing 9.5% in the first quarter, offsetting the general upward trend in commodity prices. The metal was available, but “not in the right place at the right time, and premiums were up in some parts of the world” as investors were looking for the physical metal, says Panizzutti, adding that “it was still in short supply in some parts. of the world”. “From March 2020, well into the third and fourth quarters of that year, there was strong demand (and prices) for gold in the US and Europe, says Kevin Rich, global gold market advisor to Perth Mint. During the same period, there was “very low gold demand” in Asia and gold was priced at a discount in Asian markets, he says. This year, “we have seen a reversal of this, with a reduction in demand. investment markets and a weakening of prices, while Asian markets have moved towards premiums and demand has recovered strongly. ”Without this dynamic between the east and the west, there could have been more volatility and weakness in the price of the gold, he says. Much of the downward movement in gold this year has been attributed to rising US dollar DXY, -0.47%, and TMUBMUSD10Y Treasury yields, 1.643%. “Investors switched to commodities. of the Treasury to obtain a return on their investments rsions, ”says Panizzutti. Rising bond yields can hinder investors’ interest in gold, which offers no return. Another factor contributing to the gold losses is an increase in confidence in the prospects for economic growth in Asia, mainly China, and in the US, which “triggered faster and earlier than expected”, diminishing appetite. for the gold, says Panizzutti. Looking ahead, gold prices would likely rise if equity markets soften and volatility increases, says Rich of the Perth Mint. That could happen if interest rates rise faster than markets expect, if the Federal Reserve sees the pandemic “ebb and begins to back off in support, or if inflation rises in a more sustainable way than it anticipates. the Fed, “he says. . If there are signs that the pandemic is ending, “we will see the real effect of massive stimulus spending from the global and US government,” says Rich. That could lead to gains in gold as the debt expansion threatens to weaken the spending value of the dollar. As for how high prices can rise this year, Panizzutti believes that it is “quite possible” for gold to fall back towards $ 2,000 an ounce over the course of the year. It closed at $ 1,741.60 on April 7. The “massive emergency” stimuli and subsidies injected into the global economy in the last 12 months resulted in “a very significant monetary expansion,” he says. Paper money could “lose value over time and affect purchasing power in major economies,” and gold would then become a “good hedge” against that loss of purchasing power. “We don’t think the bull cycle for gold is over,” says Panizzutti.