As the second quarter of 2020 nears conclusion, financial markets are beginning to recover from heavy losses in March and continued poor performances throughout much of the second quarter. The COVID-19 global pandemic hauled domestic and international financial markets into limbo, collapsing market growth and pushing Australia into its first recession in nearly 3 decades. As international trade channels became heavily restricted following international responses to the pandemic, gold importation into the United States saw record highs as people rushed to safety such as gold bullion. The US mint reported record gold bullion sales in March 2020 due to the pandemic.
Significant speculation of inflationary pressures follows continued large bailouts of US business by the federal reserve as the economy is struck with record high unemployment and sustained business lockdowns throughout much of the country. A Federal Funds Rate of just 0.25% has the potential to spark economic activity, but will likely further inflationary pressure while providing some heightened incentive of investment despite the dismal economics outlook.
As Fed liquidity surged, gold prices quickly followed, reaching record highs and recovering its 12.2% coronavirus-induced fall within just three weeks. However, this was not the case in Australia as the AUD plummeted offsetting the USD based gold weakness.
Large falls occurred across global stock markets spreading from the US to Australia, all the way to London. The All Ordinaries Index (XAO) provides a reliable illustration of overall market performance for Australia, consisting of the 500 largest traded businesses by way of market capitalisation. The XAO fell 36.9% from 7230 points on February 21st, to 4564 on March 23rd; Compounding the drastic decline brought on by the pandemic is the market’s slow recovery. Maintained high unemployment, continued lockdowns, and major restrictions on international trade channels has meant many of the companies traded on the ASX have not yet returned to a comparable level of trading or performance that would warrant an improving share price.
To date, XOA has only recovered 1721 points of the 2666 lost towards the end of the first quarter. As Australia’s RBA follows the trend of many central banks throughout the OECD economies in implementing expansive monetary policies, coupled with expansive fiscal policies, shares should be disproportionately benefited when compared to the gold market.
Share markets have begun to reflect excess liquidity from the Federal Reserve; NASDAQ reached record highs in June despite continued forced business closures across the United States, including many major franchise chains, such as Apple and Bloomingdales.
Central Bank liquidity has placed heavy upward pressure on the Australian Dollar, which has surged against the USD in June so far. While not indicative of the global or domestic economy’s performance, the strong AUD as brought down gold prices for Australian investors; AUD technical indicators represent a buy/strong buy indication across the board, which can be applied to a strong immediate buying opportunity for Australian investors in the gold market. AUD gold prices should rise as the AUD weakens with Federal Reserve liquidity easing and US businesses reopening trade channels into Australia.
The debt-based nature of monetary policies, including those of Australia and the United States, means assets such as stocks are disproportionately benefited when compared to assets like gold. Promoting increased lending, and as such providing a potential higher return on investment, Australian businesses will experience an influx of funds that will largely not be received by the gold market. However, the low cash rate characteristic of expansive monetary policies will mean additions to the already mounting inflationary pressures, and for this reason, the benefit to Australian businesses will be reduced in its effect, while demand for gold, and thus its price, increases as investors aim to hedge against these pressures.
As such, the gold price will likely see continued growth as inflation kicks in and corporate profits disappear, “large companies like Google still need to make profits to maintain these kinds of PE, the stock market is at record PE’s. However, how will Google be able to maintain these kinds of profits when Main St is shut and can’t afford to use marketing services such as Google AdWords where most of Googles revenue is derived from.” “You can’t print profits and you can’t print jobs, once markets face this reality you will most likely see a correction in stocks as people rush back to gold for safety”, Michael from Melbourne Gold Company explained. Seeing the current market as a strong buying opportunity, Michael is reflecting the promising opportunity a strong AUD is providing to Australian investors. The Federal Reserve’s continued near-zero bank rate will see heightened demand for gold as investors aim to hedge against likely inflationary pressures and the USD’s value deterioration, Brijesh from Reuters explains. A relatively strong AUD will solidify the buying opportunity presented to Australian investors in the gold market.
This article was written by:
Melbourne Gold Company
Suite 701, Level 7/ 227 Collins St
Melbourne Victoria, 3000
(03) 8678 2085
https://www.melbournegoldcompany.com.au/
