An increase in individual investor demand has been “offset by reduced demand from central banks,” as many of these bank reserves are being depleted due to the economic downturn, he says. 

Kung also expects central banks to act if inflation accelerates. That could lead to higher interest rates, which can pressure gold. The Covid-19 effect, meanwhile, is likely to be transitory, says Kung. These factors are “contributing to limits on gold price performance in the near term.”

As of May 20, gold futures stood at $1,752.10 an ounce, up about 15% year to date but stuck in a tight trading range of less than $60 an ounce this month. Gold trades 7.4% below the record settlement of $1,891.90 from Aug. 22, 2011, according to Dow Jones Market Data, based on records dating back to November 1984.

Against that backdrop, gold is experiencing a broad rally, with “participants ranging from state funds to pensions to [high-net-worth] clients to hedge funds.” Still, the precious metal hasn’t been able to reach record levels, as “all assets are still dealing with the deflationary shock and liquidity crisis that were accompanied by a global U.S. dollar shortage,” Grosskopf says.

The yellow metal spent some time trading lower for the year as investors sold gold in a bid for cash to cover losses in the stock market. U.S. benchmark stock indexes have recovered a bit in the second quarter.

“More investors need to add gold as a protection asset in their portfolios,” Grosskopf says. That will “create more demand than the market can handle,” he says, and with the increasing amounts of monetary accommodation and fiscal deficits, gold could move through its past highs—to $1,900 or $2,000—by the end of 2020.

He refers to gold as a chameleon, as well as an “anti-confidence thermometer” that “attaches itself to themes and…does equally well during periods of extreme deflation and inflation.”

Playing up that chameleon reference, Grosskopf says if more economies reopen and there’s a strong recovery in China and elsewhere this year, there will be inflation, and gold “will do well as bond markets get crushed.” On the other hand, if the coronavirus continues to spread and economies stay mostly shut, “there will be more money printing and debasement, [which] is also good for gold.” Still, that doesn’t mean gold is immune to suffering during a liquidity or credit crisis like the one that unfolded in March, he says.

Kung thinks gold has the potential to reach $1,900 and beyond over time. Possible supportive scenarios include a persistent correction in the equity market, a rerating in “the long-term inflation expectation…significantly above current explicit or implicit targets set by central banks,” or new economic or geopolitical conflicts, he says.

Near term, Kung sees prices trading around $1,680 to $1,780 an ounce, with a good buying opportunity around $1,700 or below.

 

Myra P. Saefong, assistant global markets editor, has covered the commodities sector for MarketWatch for 20 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005.