Few investments have rallied during this unusually volatile year other than long-term Treasurys and gold. The yellow metal has gained roughly 15% year to date, less than the whopping 20% gain in long-term Treasurys, but it’s headed higher, according to Bank of America.
Its analysts are forecasting gold prices averaging close to $2,100 per ounce next year, up from around $1,750 currently, then jumping to $3,000 an ounce before year end 2021 (in 18 months). The current gold price record is $1,900, set in September 2011.
Except for a brief retreat in mid-March, gold prices have been gaining steadily this year because the precious metal is seen as a store of value during the global recession as central banks swell their balance sheets and maintain near or below zero real interest rates and governments expand fiscal stimulus.
“The Fed can’t print gold,” write the BofA analysts. In other words, it can’t devalue the yellow metal, but Fed policies and those of other central banks, coupled with a surge in fiscal spending, can pressure government-supported (fiat) currencies, according to the BofA analysts. “Gold has outperformed every G-10 currency so far this year and also in 2019.”
They note, “If central banks double their balance sheet as GDP contracts, gold prices will push higher.”
In the U.S. the Federal Reserve’s balance sheet has grown to $6.4 trillion, up from $4.1 trillion at the beginning of the year, as a result of a multiple programs the Fed has initiated in response to the COVID-19-fueled recession. They include a revived quantitative easing program and lending facilities for commercial paper, corporate bonds and municipal bonds.
“The Fed’s latest QE program is now the largest on record,” writes Bart Melek, global head of commodity strategy at TD Securities. “There is a well-known relationship between QE and lower real rates such that it ultimately suppresses real rates by lifting inflation expectations at a faster pace than nominal rates. This creates an opportune environment for gold.”
But Melek and BofA analysts say commodity trading advisors, who are responsible for the trading within managed futures accounts, are still underweight gold despite its rally and the market variables that support it — another the reason for their positive outlooks.
ETF investors, however, have been bullish on gold. State Street’s SPDR Gold Shares ETF (GLD) is on track to record its biggest monthly inflows since 2016 — more than $4.3 billion this year — and BlackRock’s iShares Gold Trust (IAU) has had record monthly inflows already this month, taking in almost $1.3 billion, according to Bloomberg News. Both ETFs have gained close to 14% year to date. The S&P 500 has lost 13%.