Last week was a tough one for gold, as the yellow metal closed at $1861, roughly a 5% drop from the previous week. It seems as though investors are getting nervous, and for good reasons. There is a lot of volatility across all markets because of surging coronavirus cases, uncertainty surrounding the U.S. election, and doubts about an overall economic recovery. One would expect signs like these to be positive for gold, yet the precious metal still managed to close the week in the red. It seems that the high levels of uncertainty are actually driving investors towards cash. Given the huge run up that gold has had lately, this would make sense. However, many market experts view this short-term price drop for gold as a healthy correction before the sustained move past $2000 can be completed.
And here is why...
We all know that gold tends to outperform other asset classes in times of economic turmoil and uncertainty. At present, there is a huge amount of uncertainty surrounding the U.S. economy. The federal reserve chairman, Jerome Powell, urged congress on Wednesday to provide the U.S. economy with more fiscal support via a second $2 trillion stimulus package, in an effort to combat the economic effects of the ongoing coronavirus pandemic. But in order to implement another stimulus package, the money will need to come from somewhere.
To finance the stimulus package, the U.S. government will need to issue more debt and the federal reserve will need to ‘print’ more money. If it does move forward with the stimulus package, another $2 trillion would be added to the Money Supply (M2), effectively adding another $200+/oz to the fundamental spot price of gold. This would also result in an inevitable rise in inflation, an outcome which is also highly beneficial for gold over the long-run.
For a more in-depth explanation of how the government creates stimulus money, watch the following video.
Another aspect which is bringing uncertainty to the table is President Trump’s refusal to accept the results of the election if he were to lose. Moving forward, this could act as an extraordinary catalyst for gold prices.
- SmallCapInvestor