You probably know by now that at least two promising vaccines are coming to the rescue during the greatest public health crisis in recent history. It appears we finally can say out loud that we have reason to believe the COVID-19 pandemic will come to an end.
When we finally get the pandemic under control with the help of vaccines, it makes sense to believe something else will come to an end: the aggressive fiscal and monetary stances of the government and Federal Reserve, designed to blunt the pandemic’s economic effects. These stances include the Fed’s “whatever it takes” posture on quantitative easing (QE), as well as Washington’s massive deficit spending sprees. It’s worth noting these initiatives also have been seen by some as principal reasons for gold’s notable rise this year.
So news of a vaccine’s imminent arrival necessarily beckons the following question: Will gold have anything left in the tank when the pandemic finally is defeated? Or will the COVID vaccines suppress the gold bull as well as the novel coronavirus?
With containment of COVID-19 in sight, experts are beginning to disagree over what’s next in store for gold. Some anticipate a return soon to an economic “normal” that leaves gold in the dust. Others, however, believe gold’s principal drivers this year – QE and record-level deficit spending – will be with us for a long time to come.
A recent article at Yahoo Finance also sought to answer the question whether the gold bull market could outlive the pandemic. As part of its effort, the piece sought insight from those who have very different ideas as to gold’s future prospects.
Tai Wong, head of metal derivatives trading at BMO Capital Markets, thinks the gold bull’s days are numbered. Wong told Yahoo “the strongly positive vaccine news augurs the real prospect of a return to normality perhaps by spring.” Translation by me: Gold soon will be out of favor.
Darius Tabatabai of Arion Investment Management also doesn’t like what he sees in gold’s future. In his case, he thinks gold’s run will be brought to an end by the political division in Washington. Specifically, Tabatabai believes that division could serve as an obstacle to future gold-energizing COVID-related stimulus packages. “It’s unlikely now, with a split Senate, that this serious level of fiscal spending goes on,” Tabatabai opined to Yahoo.
However, Suki Cooper, a precious metals analyst at Standard Chartered Plc, remains all-in on gold. She told Yahoo the “risks to gold prices remain skewed to the upside given expectations of loose monetary policy, with real rates remaining low or negative globally.”
So who’s right?
None of us knows for sure, of course. But I’m inclined to agree with Ms. Cooper’s assessment, and I hardly think I’m going out on a limb to do so. I believe we can expect a possible continuation of the same gold-favorable monetary policy initiatives that have sparked the metal this year. That potential is based largely on the Federal Reserve’s own publicly declared agenda for the post-COVID era.
Federal Reserve Governor Lael Brainard again reiterated the central bank’s long-term commitment to accommodative monetary policy on last month’s “Post-COVID Policy Challenges for the Global Economy” webcast sponsored by the Society of Professional Economists. Brainard said the central bank will keep rates at zero until maximum employment and an average inflation rate of 2% are achieved.
She further suggested the Fed will not begin to raise rates until at least 2024. Even when it does, she added, the path upward will be “gradual.” In other words, we could be looking at zero-to-very-low interest rates for a long time to come.
This repeated public declaration by the Fed regarding its own longer-term outlook is partly why I’m puzzled by those who think the advent of vaccines means the end of the gold bull. It seems perfectly reasonable to consider that pro-gold monetary policy could remain a long-term part of the national economic fabric.
So the monetary policy part of the pro-gold equation in the post-COVID era appears to be intact. What about the fiscal policy part of the equation?
Analyst Darius Tabatabai’s opinion notwithstanding, the fiscal outlook as it relates to gold looks good to me, as well. The recent election may not have resulted in the “Blue Wave” predicted by so many. But Democrats still are in good shape when it comes to pushing ahead their broad agenda for the nation. They obviously control the White House and the House of Representatives. And while the Senate might see a slight Republican majority maintained following the upcoming Georgia runoffs, such a slim margin doesn’t guarantee GOP blockage of Biden proposals.
President-elect Biden was a well-liked and respected member of the Senate for 36 years. Given this, he may be able to persuade centrist Republicans to lend a measure of support to at least some elements of his expensive agenda.
According to the Committee for a Responsible Federal Budget, the eventual cost of the new president’s initiatives could add as much as $8 trillion to the federal debt by 2030. Based on similar past economic periods, that kind of spending could have the potential to weaken the dollar and raise inflation expectations – often considered to be good influences on gold prices. With the Fed’s plan to remain aggressively accommodative, the outlook for gold appears it could be positive for some time.
Obviously, none of us knows for sure what the future holds. That, of course, includes retirement savers, many of whom we are sure would love access to a crystal ball as they guide their portfolios during this tumultuous period in our nation’s history.
Still, even without the ability to know the future, there do seem to be sound reasons for thinking a pro-gold environment might remain in place. And there’s no shortage of analysts who say they like gold’s prospects in the months and years to come. Even with the imminent launch of vaccines in full view, Goldman Sachs sees gold climbing 22% next year from present levels.
Looking down the road even further, some observers have especially robust projections for gold based on anticipated monetary and fiscal climates. For example, Devlyn Steele, Augusta Precious Metals’ Director of Education, forecasts gold hitting 5,000 dollars per ounce within the next three years.
Can the gold bull market survive beyond the pandemic? I believe the bull has the capacity to do it. Will it? That remains to be seen. But we have to consider the very real possibility that this year’s winning gold formula still could be with us long after the pandemic has been contained. If it is, chances are good that gold could remain strong in the years ahead.
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