Why The 2020 Gold Rush Is Not Over

Gold Rush

The Gold Rush Pause

This year, precious metals so far have seen a rise in demand and price that has not happened since 2011. The 2020 gold rush saw the gold price rise by approximately $500 since the beginning of the year despite fluctuations. The lowest gold price of 2020 was about $1500 in March, and it reached a high of $2047 on August 8th. Last week, the gold price plummeted from $2000 to an overnight low of $1890 on August 11. Despite this drop, the gold price is slowly picking itself back up for the gold rush, especially on Monday where it balanced around $1990. How can this be?

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues

Q2 2020 hedge fund letters, conferences and more

Gold Rush

For starters, jobless claims for the week of August 8 plummeted to only 963,000 for a two-week-streak decline. This is the first time that claims fell since the pandemic. The gold rush, therefore, began to slow, then rose again on Monday August 17th. December Gold Futures closed around $1950 per troy ounce before the weekend. This was still lower than the week before that, but the price appears to be steadily increasing. Its high as of August 17th was $2,000 per ounce.

So why did gold not jump after the jobless claims report release? Some believe it is because although there was a decline in claims, they still remain high due to the pandemic. Naeem Aslam, the Chief Market Analyst of AvaTrade, reasoned that not many people are actually selling right now. But, gold was overbought last week. On top of that, Will Cai of Wilshire Phoenix Funds maintains that gold is becoming more important to diversify with and create a long-term hedge against inflation and volatility.

As more people turn to gold, it appears the gold rush has room to grow. Now that Warren Buffet seeming joined the gold rush in the form of Barrick Gold shares, the gold price steadily rose on August 17th. Gold is certainly glittering in the eyes of investors, and its appeal might continue for a long time against other assets.

Return of the Roaring 20’s Stock Market?

Ed Yardeni, the Chief Investment Strategist at Yardeni Research, on August 12th noted similarities between the 1920s and the path for 2020. He compared the situation of the 1918 Spanish Flu to 2020’s COVID. Considering the economic climate, this poses the question, does history repeat itself?

What Happened During the Great Depression?

Let’s take a moment to briefly consider the Roaring 20s. The stock market was handled in an irresponsible manner with a surplus of Americans entering the market and dumping all their savings into investing. The market rapidly expanded in response. But with many people buying on credit and having low wages, debt and a surplus of unsold goods accumulated. Even the agricultural industry suffered from drought and cheaper food prices.

Gold Rush

Source: BusinessInsider

Finally, in October of 1929, the stock market crashed as overpriced shares were sold off with many individuals seeking to cut down on debt. The stock market crash of 1929 led to a panic at Wall Street, which destroyed millions of people’s investments. Then, the next several years saw reduced consumer spending and investment. This led to further declines, weaker industrial output, and greater unemployment. People tried to buy stocks with borrowed money, which fell through. This demonstrated that if there are little to no consumers, then the economy cannot function.

There was also a brief gold rush at this time. From 1929-1934, the price rose from $20.67 per troy oz to $35. People hoarded gold as the Federal Reserve tried to maintain the gold standard. In 1934, however, President FDR outlawed private ownership of precious metals. He believed investing in gold and not participating in the economy stalled the recovery. As a result, gold ownership was not permitted until 1974. Then, President Gerald Ford overturned the Gold Reserve Act with Executive Order 6102. Fun fact, the American Gold Eagle was the first modern US gold coin program since the re-legalization of precious metals ownership!

Yardeni’s Analysis

Although comparing the Great Depression to today is ominous, he also suggested that we still have time before a massive stock market crash like 1929. As of this time, he believes that stocks will finish in the green for the year, and possibly continue into 2021. However, he sounds the alarm for 2029 as the year for the next massive stock market crash. Fears surrounding another major crash into a Depression also signals an environment for the gold rush to continue. Possibly the most positive piece of good news from Yardeni is increased medical research. He asserted that this might lead to significantly more efficient medicine against more illnesses. This could include most strains of the coronavirus in the future.

This analysis appears to be in line with Goldman Sachs’ prediction. Jeffrey Currie, the Head of Commodities, argues that even if there is a vaccine in November, it might not be widely accessible until Q1 of 2021. What this means to Currie is that we need more economic stimulus. More stimulus means there is more downside risk in real rates. As a result, this will drive gold up, furthering the gold rush. This is especially true if the Fed prints more money and inflation rises.

Should I Hold On To Cash?

Last week, an interesting study by fund management giant Vanguard Group made headlines. Their study focused on what happened to investors who abandoned the market during the pandemic. According to their study, those who cashed out of the market early did not end up doing better than those who stayed.

Although at the end of March, they did better, the market went up again, and they missed its rise. “By the end of May, 84% of the defined contribution cash panickers had worse returns than their pre-pandemic portfolio, which 86% of retail cash panickers doing worse” (Goldstein, MarketWatch). Vanguard also said that less than 0.5% of their clients moved into total-cash portfolios.

If Yardeni predicts a crash in the next nine years and the government has not yet agreed on a COVID stimulus package, should you be working on massively growing your savings? The general consensus is if you can afford to do something like buy a house or join the gold rush, then you should do what you think is best for you. Borrowing rates are low for the rest of 2020 at least. The gold rush demand is also lower than it has been for at least a week, so if you are looking to buy gold, it is better to make a plan to do it soon. The gold rush has room to further expand, especially with the election looming over the United States.

The post Why The 2020 Gold Rush Is Not Over appeared first on ValueWalk.