What happened to gold prices yesterday?
An article on Kitco explained: “The move down is not too surprising as many analysts have been calling for a price correction after gold breached $1,920 an ounce, then $2,000 an ounce, and then continued to make new highs above that level. And all of this in just under three weeks.
Bob Thompson, Senior VP Portfolio Manager at Raymond James agreed ”“ It was a well needed breather. I have been telling people that the longer the climb went without a correction, the more violent it would be. I don’t know if it will be this one, but a correction will happen that will shake the tree and will get all the non-believers in the sector out. That’s the nature of it. The people who have been gambling in the last couple of months will lose money, lose faith, and get shaken out.” This reminds us of a famous quote from J.P. Morgan “In bear markets (or in this case market corrections), stocks return to their rightful owners.”
Now the million dollar question; how far will it drop?
“Given that the U.S. economy will continue to positively respond to an additional trillion dollars worth of fiscal stimulus and continued Fed measures, it is quite likely that rates and the dollar may see some better days into 2020. Given the technicals and the fundamentals, it would not be surprising to see spot gold trend down to around $1,890/oz and silver at around $22/oz, before hitting new records.” TD Securities head of global strategy Bart Melek said on an interview with Kitco yesterday.
Joe Foster, portfolio manager of the VanEck International Investors Gold Fund believes that rather than trying to time the bottom of this correction, investors should be looking ahead to the potential new price highs. He said on this interview “ The longer-term bullish picture still remains intact. We’ve been looking for a pullback in the gold market. Nothing goes straight up forever. Real interest rates are negative. They turned negative last year when the Fed started cutting rates. If you look historically, that doesn’t happen very often. Real rates were negative after the financial crisis, and you have to go all the way back to the 1970s in that inflationary cycle to find negative real interest rates. The Fed has told us that it’s not interested in raising rates any time soon, so I think we’re going to be in a negative real rate environment for the foreseeable future and that’s a very good backdrop for gold. Geopolitical risks, a weaker dollar and the increase of global debt are also tailwinds for gold. We could be seeing the beginnings of a bear market for the dollar, and that’s another bullish development for gold.”
VanEck predicts $3,400 an ounce price based on historical deflationary price cycles.
“There aren’t very many to draw on. You can go back to the Depression, but more recently, we look at the Financial Crisis in 2008. That was a deflationary shock to the economy, just like the pandemic has been a deflationary shock to the economy,” Foster said. “If you look at where gold went after the Financial Crisis and you apply the same metrics to gold in the current environment, you can get to over $3,000 an ounce.I think the stocks will outperform gold by a wide margin. We’re seeing it this year, we saw it last year. The gold industry is in very good shape this year. It’s very healthy. It’s a great business to be in, so I see no reason for these stocks to handily outperform gold,” he said.