Gold could break past US$2,000 level, says analyst, as market volatility drives demand for haven assets
Surging demand for gold among investors could mean prices of the yellow metal could “well and truly break out past the US$2,000 [per ounce] level”, according to an investment advisor.
Speaking to Proactive on Thursday, Shaw and Partners WA state manager Davide Bosio said the recent high in the gold price of around US$1,770 per ounce was “not surprising” and that given the recent “crazy times” for the global markets there could be even more positive momentum buying the surge.
“Maybe I’m a die-hard gold bull, but I think this has been a particularly long build-up to what I think is a huge move for precious metals. I think that the retail money and a lot of that euphoria is only just starting to come into this market”.
Bosio said that the recent upswing in gold in down to a number of key reasons, one of which is the sharp decline in real interest rates that he expects to remain for a long time and “really underpins” the value of gold.
He added that once this run kicks off properly, and with ongoing geopolitical and economic volatility, gold prices could “really break out well and truly past the US$2,000 level” and potentially even up to US$3,000 an ounce.
The possibility of a massive rally in gold prices is also good news for explorer and producers of the yellow metal in the mining sector.
Bosio said it is “the perfect time” for gold producers after a period of little market support, however, they are now able to take advantage of the rally to boost their cash balances and margins.
“These companies are producing a lot of cash, they have low debt historically…I feel it is the perfect environment for these big companies to take advantage of strong share prices, strong cash balances and low debt to really go out aggressively on the [mergers & acquisitions] trial”.
Junior explorers are also receiving a boost as the soaring gold price makes it easier for them to tap the market.
“A year ago [smaller gold firms] couldn’t raise any money. Right now they can raise as much money as they want. There is a wall of capital looking for gold opportunities”, Bosio said.
He added that the exploration part of the market is also the area of “high adrenaline”, but investors can exploit opportunities at all areas of the market as gold’s value climbs.
Investors flood into Gold ETFs
The surge in the value of gold amid the ongoing turmoil in international markets has not escaped the attention of investors, with gold-backed funds seeing a surge of interest as they look for safer areas to park their cash.
In a report released in early June, the World Gold Council (WGC), the market development organisation for the gold industry, said inflows into gold-backed exchange-traded funds (ETFs) over the last five months had outpaced records for any whole calendar year, hitting a record high of US$195bn worth of assets under management (AUM) in May.
“Gold ETFs saw inflows on all but two trading days over the past two months, underscoring that investors are embracing gold in both risk-on and risk-off environments”, said Adam Perlaky, an investment researcher at the WGC.
“As investors seek to efficient and effective strategies to hedge ballooning budget deficits and high valuations for both stocks and bonds, collective holdings of gold ETFs exceed the official gold reserves of every country except for the US”, he added.
Looking ahead, the WGC concurred with Bosio assessment that the lower interest rate environment, driven by continued central bank activity and an uptick in inflation expectations, was likely to remain as a key motivator for rising gold prices.
Uncertainty around the coronavirus pandemic as well as civil unrest and an economic downturn was also likely to push the metal higher, the WGC said.