A Green Light For Gold?

Apr 1, 2020

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Did The Greenback Just Give A Green Light To Gold Stocks?

There could be a mounting domino effect in the works right now. The main cause: COVID-19. The fact that social distancing was extended to the end of April and some states like Florida are enacting a “stay at home” order into May could trigger even more fall-out. Right now we see a potentially perfect situation for gold. We’ve got low interest, low Treasury yields, and slowing economies across the world. And just recently the government stimulus was approved. Did that just give a green light for the yellow metal?

New Stimulus Money Is Set To Flood Markets; Dilution Ahead For Greenback?

Right now we see a potentially perfect situation for gold. We’ve got low interest, low Treasury yields, and slowing economies across the world. What more could we ask for? A weaker dollar is what’s apparently desired.

For all intents and purposes, the climate for a bullish gold price could be near ideal with the exception of that last part. Based on the strength of the U.S. dollar, gold prices have been all but held back from what could be a massive uptrend. But is the writing already on the walls for what’s to come?

[Special Report] A Big Money Bet On Junior Gold Stocks

Gold and silver prices traded lower on Monday as the U.S. markets rallied. Furthermore, a boost in the US dollar index also helped subdue gold gains for the time being. But previous to this, it could have been an ideal setup for gold’s next leg.

During the overnight markets on Sunday, traders and investors assumed another troubled week of trading. But even in spite of this, stocks moved higher even amid lower trading volumes. With the first quarter coming to a close on Tuesday, eyes will be laser-focused on key economic metrics.

A Domino Effect

People need to pay bills but the economy is all but shut down. Major credit agencies are also up in arms to figure out how to deal with the companies that may be in a serious bind right now. On top of this, the full blowback of the coronavirus is still very much unknown right now.

The signs continue to point to a favorable market for gold. Albeit the momentum may be taking a bit longer than anticipated. We’ve seen the 10-year note yield trading just over 0.60%. That’s even lower than levels last week. So, we can assume even the bond markets are uneasy right now. In turn, this is another checkmark in the box favoring higher gold prices.

“Gold’s ‘outlook remains bullish as world adjusts to never-ending promises of monetary easing, but the next rally may be more of an escalator ride than elevator one.”

Edward Moya, senior market analyst at Oanda

The general sentiment remains strong for gold and gold stocks. If you look at something like Barrick Gold (GOLD) stock, for example, shares haven’t much waivered in light of the recent pricing of gold. Meanwhile, we see other gold stocks like Newmont (NEM) treading water as well. As the gold market may be generally unsettling right now, it’s worth noting that once stimulus money starts flowing, it could be the official sign of things to come.

Headline Risk Poses Short Term Hurdle

And by that, I would refer back to the value of the U.S. dollar. New greenbacks coming into the market both from the Federal Reserve and U.S. government could mean decreased value in the near term. Seeing at this could be the final straw, it may be the puzzle piece left before gold prices begin the next move.

Then again, for gold bulls, headline risk has become an issue. Whenever the U.S. President announces he will announce something, markets have taken a bullish tone. No matter what’s actually said, the immediate reaction is favorable for stocks. But how much longer can that last?

We’ve got an economy in disarray, socialism at its finest seeing governments effectively support their citizens with even the smallest sums, and the high likelihood that the next few quarterly reports could be bleak. On top of that, we’re likely to see some of the highest unemployment in modern history. So you tell me, what will be the next big piece of news to keep the markets in rally-mode?

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Certainly, a vaccine or some type of treatment would be a viable option. This would at least have a chance at getting the economy back in some sort of working order. But that doesn’t negate the fact that damage has and is being done right now that would still have effects into the 3rd quarter, conservatively. From an economic perspective, the lasting impact could take years to remedy.

Economic Slowdown Can’t Be Avoided

The US and Eurozone’s economies could take until 2023 to recover from the impact of the COVID-19 coronavirus crisis, according to a new report from consultancy McKinsey & Company.

According to the World Economic Forum, “Success in containing the virus comes at the price of slowing economic activity, no matter whether social distancing and reduced mobility are voluntary or enforced. In China’s case, policymakers implemented strict mobility constraints, both at the national and local level—for example, at the height of the outbreak, many cities enforced strict curfews on their citizens. But the tradeoff was nowhere as devastating as in Hubei province, which, despite much help from the rest of China, suffered heavily while helping to slow down the spread of the disease across the nation.”

A Rally Cry For Gold Stocks?

As stated earlier, Barrick gold stock, Newmont gold stock, and even smaller ones like Yamana gold (AUY) stock have maintained some semblance of support over recent weeks. We saw a direct correlation between gold and broader markets last week. But at the start of this week and of the new month, things have begun to diverge a bit.

While no one has the crystal ball, it’s hard to ignore the glaring signs that typically favor higher gold prices. This also doesn’t take into account the current state of the physical gold market. This tends to be ahead of the price of gold on paper. In an article from earlier this month, we discussed this in a bit more detail.

“There’s no gold. There’s roughly a 10% premium to purchase physical gold for delivery. Usually, it’s like 2%. I can buy a one-ounce American Eagle for $1,800; $1,800!” said Josh Strauss, partner at money manager Pekin Hardy Strauss in Chicago. He’s one of many who are finding low supply, high demand pairs in the physical gold market.

On top of this, we also have nearly ever gold miner slowing some parts of their operations in favor of a cautious move to stay protected from COVID-19. This is yet another layer that could slow down supply making demand the greater of the two in this economic equation. Considering the underpinning of a global economic slowdown, could we be looking at a green light for gold stocks right now?

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