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Written by: Arkadiusz Sieron, PhD
The U.S. is still knee-deep in the first wave of Covid-19. So, gold should be still knee-deep in the bullish wave.
“Really not good.” This is how Anthony Fauci, the U.S. leading infectious disease expert and the member of the White House Coronavirus Task Force, described the current state of the epidemic in America.
Fauci is right. Please take a look at the chart below. As one can see, the number of new daily confirmed cases of Covid-19 has surged recently, surpassing the April peak and jumping above 50,000. Since the beginning of the pandemic, almost 3 million Americans have become infected with the coronavirus and more than 130,000 people already died in the U.S. because of it.
The surge in U.S. coronavirus cases has made people worry again. Raphael Bostic, Atlanta Fed President, said on Tuesday:
We are hearing it more and more as we get more data. People are getting nervous again. Business leaders are getting worried. Consumers are getting worried. And there is a real sense this might go on longer than we have planned for.
Indeed, more and more states and countries are rolling back the economic re-openings or even re-imposing lockdowns. For example, Melbourne, Australia’s second biggest city, ordered its residents to stay in their homes for six weeks amid the resurgence of infections. In the U.S., New York expanded its travel quarantine for visitors from three more states, while Florida’s greater Miami area rolled back its reopening.
However, the White House pushes the country to fully reopen, as President Trump said on Tuesday that the U.S. is “not closing, we’ll never close”. Given the resurgence in new cases, such calls are controversial. The full lockdown is, of course, absurd, and the incidence of deaths from Covid-19 are declining, but this is because the new infections occur mainly among young people. But if the coronavirus spreads wider, the daily number of deaths may rise again.
Implications for Gold
What does it all mean for the gold market? Well, data shows that current pandemic will remain active for longer than many people anticipated. As Fauci noted, America is “still knee-deep in the first wave and unlike Europe, U.S. communities never came down to baseline and now are surging back up.” This is great news for gold prices. The longer the outbreak of Covid-19 lasts, the longer the safe-haven demand for gold will remain elevated. Moreover, until the health crisis is fully resolved, the economic activity will be subdued, while both the Fed and the Treasury will stick to the ultra-easy monetary and fiscal policies. After all, a resurgence in coronavirus cases makes Americans more cautious, hampering consumer spending and GDP growth. It will also make the disconnect between the real economy and financial markets even larger. Importantly, some of the government stimulus programs will expire at the end of July, so either the U.S. economic growth will slow down or we will see more fiscal and monetary measures. Given the upcoming presidential elections, the new round of support is likely, which should raise worries about the level of the U.S. fiscal deficit, federal debt and inflation, supporting the gold prices.
Not surprisingly, gold has been gaining recently. As the chart below shows, the price of the yellow metal has jumped above $1,800 yesterday (the chart paints future prices, but spot prices also surpassed this important psychological level).
Of course, it remains to be seen whether the price of gold will stay above $1,800 for long. But even if it retraces some gains in the near future, the further march upward is a matter of time in the current macroeconomic environment.