Gold hits a new record
It was only a month ago that we upgraded our end of year price target for gold to a price range of US$1,925 to US$2,000 an ounce from our previous target range of US$1,625 to US$1,675 an ounce. The gold price at the time of writing in June was trading around US$1,780 an ounce. The gold price in recent trading hit a new record at circa US$1,970 an ounce to compress six months of price action into one month. The following chart shows the long-term US gold price:
Source: Trading Economics
We espoused our year-end gold target upgrade on the collective action by governments to stimulate individual economies, to counter the economic disaster brought on by the COVID-19 pandemic. Accumulatively, spending has been estimated to be in the range of US$9 trillion to US$10 trillion. From a time perspective, little has changed since our June update, with only the narrative by governments tightening around a determination to defeat COVID.
We said in June that the onset of the COVID-19 pandemic had amplified several factors, we believed, would push the gold price higher over 2020. It appears we should have said “turbo charged.”
With the gold price now sitting just below our year-end price range, some caution is now required, and we would not likely be chasing gold stocks at current prices.
So, what has changed in the past month that has further stimulated the gold price to hit a new record? There is one clear data read that captures growing government debt pools and growing government budget deficits and has, we believed, been the catalyst to push the gold price to a new record high.
When talking about gold, the focus much shift to the US, as gold is priced in US Dollars. On the US front, there has been a significant change in the rate of growth in the M2 money supply in the economy. The following chart shows the medium-term movement in M2 and the gold price (in US Dollars):
Source: US Federal Reserve
As Members can see from the above chart, there has been a clear acceleration in the rate of growth in the US M2 money supply. The M2 can be defined as M1 which consists of physical currency and coin, at call demand deposits and cheque accounts with the addition of near money being accounts that cannot be converted to cash as quickly.
The onset of COVID-19 has seen the US government directly provide wage supplements to its citizens, in a move to counter the loss of wages, as unemployment in the US skyrocketed. The following chart shows the US unemployment rate with the onset of the COVID-19 lockdowns:
Source: Trading Economics
These supplements are directly included in M2, and in doing so have accelerated the rate of its growth. More money circulating in the system, devalues fiat money on extra supply; a topic we have addressed on many occasions in our dailies. We would expect, as the unemployment rate in the US continues to require the US government to provide wage supplements, the US M2 will continue to expand at extraordinary rates and hence continue to drive the gold price higher, as the US Dollar deflates.
Already, as Members can see from the above chart, the rate of unemployment is on a downward trajectory, as the services sector in the US cranks back into activity. Some 71% of the US workforce is employed in the private service sector or around 108 million people, and it was this sector that was severely and quickly impacted by the lockdowns. In the near-term, we cannot see a scenario were this will change, until there is a readily available vaccine. The time horizon for a vaccine is as close as by years’-end and as far as two to three years. All we can add is “it will come” and likely, given the resources being thrown at the finding of a vaccine, soon rather than later.
Gold will continue to act as a “safe haven” in times of turmoil and uncertainty, with the COVID-19 pandemic certainly delivering on this front. The added pressure on the gold price has come from the direct stimulatory action of the US government. The following chart shows the long-term growth in US M2:
Source: US Federal Reserve
A scenario that was last seen in the wake of the Global Financial Crisis, with what was then extraordinary M2 growth rates and a gold price that hit a, then, new record. The difference to then and now is the direct nature of the current stimulatory packages and the quantum, some US$9 trillion to US$10 trillion compared to then circa US$4 trillion to US$5 trillion.
We will persist with our end-year price forecast for gold in the range of US$1,925 to US$2,000 an ounce and recommend that gold stock not be chased in the current gold pricing environment.
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