Gold could head towards $ 5,000

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The current year turns out to be a Annus mirabilis for gold investors, with the riot running from the yellow metal. Gold prices are currently trading at $ 1,933 an ounce, not far from their all-time high of $ 2,075 reached a month ago. That’s good for a gain of 26.5% year-to-date and 30.9% since their 52-week low in March, compared to a 6.3% gain year-to-date. . S&P 500. The scorching rally represents the metal’s sharpest gain in over a decade. This is hardly surprising given gold’s traditional role as a safe haven asset that many investors turn to in times of deep crisis – and few can compete with the economic collapse induced by COVID-19. The Covid-19 situation has improved somewhat, but hedge funds, Wall Street and investors continue to be extremely bullish on gold, with some licking their chops and predicting that the yellow metal could hit absurd levels of as high as $ 3000 and even $ 5000 an ounce.

Bank of America Merrill Lynch s’attend à ce que l’or reached $ 3,000 in early 2022 while Citigroup and billionaire Thomas Kaplan, founder of New York-based asset management firm Electrum Group, believe that $ 5,000 is in the crosshairs.

It certainly sounds like a golden bug’s dream. But what would such a rise imply for the rest of the financial markets?

Source: TradingView

The virus certainly unleashed a torrent of forces that fueled a relentless demand for gold and its age-old credentials as a safe haven. Gold markets tend to prosper in times of deep economic crisis when bonds offer stable or negative returns or when stock markets become too volatile.

All of this certainly held true during the crisis.

The global economy was already showing signs of unease long before the Covid-19 pandemic, prompting central banks around the world to cut interest rates to historically low levels. Investors tend to look to safe haven assets like gold in low interest rate environments, although the link between gold and interest rates has weakened since the 1970s after states -United have abandoned the gold standard.

Related: Oil Rig Has Higher Inches Amid Falling Prices

That said, there is a clearer correlation between economic crises and gold rallies. Several months ago, the World Bank sounded the alarm that the crisis was likely to plunge the economy into the worst recession since World War II. People tend to flock to havens like gold and silver during times of heightened geopolitical and economic uncertainties, which in turn supports the rise in gold prices due to gold. price elasticity as Erb and Harvey noted in The golden dilemma. As Citigroup analyst Heath Jansen noted:

“When investors are thirsty for gold, the metal has a habit of growing exponentially, which has no equivalent among metals.”

Unprecedented stimulus packages from central banks also played a role in the rally. A few months ago, the world’s central banks handed out huge stimulus packages to the tune of $ 15 trillion in an effort to prop up the economy against the effects of Covid-19. While this has helped stock markets recover at a faster than expected pace, the excess stimulus has unfortunately led to the classic cobra effect and unintended consequences, one of them being a weaker dollar. A weaker dollar tends to drive up the prices of dollar-denominated commodities like gold.

Source: Investing.com

The real end of the game

Unfortunately, gold prices flirting with five-figure prices would probably be a very bad place.

On the one hand, such levels would imply hyperinflation and perhaps stagflation like the 1970s in the United States.

It would involve exceptional political and social unrest and push the country into a veritable hyperinflationary death spiral with just about all commodity prices skyrocketing. At the same time, the real value of most commodities would decrease dramatically as people focused on simple survival.

If the price of gold started to approach $ 10,000, the dollar would likely lose its status as the dominant currency in the world. Many other fiat currencies would lose value with another currency, such as the Swiss franc becoming the world’s reserve currency. In desperation, First World governments would likely resort to dirty tricks, including imposing foreign exchange controls on any form of money crossing their borders or even confiscating individual bullion as the US government did during the great Depression.

Gold prices are currently near their all-time highs. Another 10%, 20% or even 30% rally by the next 12-24 months won’t necessarily rout the global economy. But claiming $ 5,000 could cost more than we can chew.

By Alex Kimani for OilUSD

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