Gold investing outlook #34

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Bespoke Investing, Business and Economics, coronavirus, Fed rate cuts ineffective, Invest in Gold now

Gold investing outlook #34

Note firstly the updates to Gold investing outlook #32 of 28.2.20 and 2.3.20 (per Gold investing outlook #33, published on 19.2.20 as Updates to #32).

Incorporated in the EP values are Malaysian forex ups and downs – varying with crude oil prices and local political developments. The EP (MYR per gram) values thus provide a simple comparative depiction of different values of gold over time in the Malaysian context.

As at 3.3.20 Pundits Y pointed to gold outperforming stocks by a significant margin thus far this year. They reckoned gold was up 4.8% on the year while the Dow Jones Industrial Average was down 7.5% even after the sharp move to the upside of a 12.3% swing on 2 March.

The U.S. Fed rate cut of 50 basis points on 3 March could be a signal that the US economy could be in serious trouble because of the virus outbreak. Stocks’ pullback into negative territory showed just how aggressively the market had already priced in a rate cut. The 10-year Treasury bond yield dropped below 1% for the first time in history reflecting investors’ increasingly worries about the novel coronavirus outbreak. It was its first emergency cut and the first cut of that size since 2008.

The Fed target range is now 1% to 1.5%. On 4.3.20 gold at $1643 is holding its own under trying circumstances for financial markets.

Rate cuts are really ineffective for countering low consumer demand due to coronavirus. Also lower rates and with them lower yields are a problem for investors looking for a decent return without much risk. On the positive side, lower interest rates for consumers can move down rates on retail products such as mortgages and bank loans. It is also good for companies looking to refinance more expensive debt.

A Pundit M’s trajectory is gold breaching $2900 based on his technical charts.

The US stock market collapsed between October 2018 and December 2018. Gold over the 2007 to 2011 rally had a number of moderate to serious price corrections taking place within that extended rally. Gold rallied from $1050 in 2009 to $1890 (+80%) in 2011. Gold had rallied to levels nearing the previous peak levels circa $1380, then rallied even further to $1540.

The current downside price rotation is similar to the downside price rotation that took place in August / September 2010 – just before gold rallied from $1050 to $1890 (+80%). This time around the peak price of gold may be near $2935 in 2021, surging from $1566 for a gain of 87%.

Update on 6.3.20: On 6.3.20 gold closed at $1673.87 and according to a Y pundit gold was up 10.7% this year. He also noted that since bottoming in August of 2018 gold has soared past $1,400 and on 4 March gold passed the $1,600 threshold for the first time in 7 years.

Dow closed at 25,864, down 11% this year whereas gold was up 10% with EP value at 227.63 compared with 207.56 (new base) and 228.22 (recent high on 24 Feb when gold reached $1688.60 at one point).

Gold hence was still a valuable safe haven asset especially in the Malaysian context. EP 227.63 is up 12.5% for the year (compared with world gold price 10% increase) reflecting a weakening ringgit against the greenback due to depressing crude oil prices.

Update on 9.3.20: Gold in the Malaysian morning session was $1696.61 with EP 232.14 representing 14.8% up this year because nymex crude was about $32.90 per barrel. According to a Pundit C, crude oil even dived to $30 per barrel, $20 below cost of production.

Pundits Y expect further US Fed rate cuts this year but then it will not counter workers taken ill because of coronavirus not reporting for work at factories. Malaysia might reduce workers contribution to retirement funds and planning for tax cuts could be better because it would prop up consumer spending.

Later world gold prices drifted lower to $1662.40 and steadied back to $1680 before dipping to $1600. Que sera sera so long as it steadies again above $1673 and the EP holds up.

Update on 12.3.20: Gold in the Malaysian mid- session was $1632.58 with EP 226.16 representing 11.8% up this year because nymex crude was about $32.16 per barrel. The EP was still higher than the new base when gold was at $1566) by 8.9%.

At this point we had liquidated our gold holdings (balance of 1 gram only) when gold was in the $1650 to $1680 range. We will start increasing perhaps at the end of March and only if world gold price is above $1700 per ounce.