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Point/Counterpoint: Gold Bulls Vs. Bears

CommoditiesMay 22, 2020 06:24PM ET
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© Reuters.

By Barani Krishnan and Geoffrey Smith

Investing.com - Gold prices ended the week on a high note, as escalating tensions between China and the U.S. over Hong Kong and Covid-19 pushed money into the safe haven.

But the gains on Friday were the exception, not the rule, as the yellow metal faced pressure throughout the week as optimism over the reopening of economies across the globe increased.

With prices above $1,700 per ounce, can gold keep pushing higher?

Geoffrey Smith argues that gold is no longer needed as a hedge for inflation and that as soon as the economic uncertainty of the pandemic fades, there will be even less of a reason for money to flow to the safe haven.

Barani Krishnan says the Federal Reserve’s unlimited ability for monetary stimulus and the likelihood of continued trouble between the world’s two largest economies will be enough to take gold to new heights. This is Point/Counterpoint.

The Bull Case

Let’s face it, we’re witnessing one of the most challenging periods in what is arguably gold’s best year since the record highs of a decade ago.

Continuous stress to the global economy and health from Covid-19 means safe havens will be in demand for the foreseeable future and there’s promise for gold to reach $2,000 per ounce or beyond by the year end, rewriting its 2011 peak of above $1,900.

But promises are also society's way of ordering the future and their coming true is often contingent on a couple or more permutations.

In the bull case for gold, there are basically two fundamental challenges.

The first is a Wall Street that’s up and raring to go as America strives for a full reopen from lockdowns instituted over the pandemic. Higher risk appetite for stocks typically lures money away from safe havens, such as gold.

Next is the dollar, which has increasingly become a faux safe haven in competition with gold, particularly when U.S.-China tensions escalate. The dollar’s standing as the reserve currency of the world enables it this unique upside, even when U.S. trade might be at risk.

But while there’s daily noise from stocks and the dollar in gold trading, the yellow metal’s breakout from the critical $1,500 range at the start of the year is a clear sign of the wind behind gold.

Despite range-bound trades of the past few weeks, gold has not only held to the $1,600 perch, but also breached $1,760. Year to date, the yellow metal is up 14%, making it the only major commodity that’s in the black for 2020. Oil, in contrast, is down 45% on the year, despite all the positive headlines now about crude's comeback.

Gold’s next major target of $1,800, and subsequent push for $2,000, will be enabled by the Federal Reserve’s virtually unlimited resources and appetite, above that of other world central banks, in aiming trillions of dollars of stimulus at fiscal stresses from Covid-19.

Renewed U.S.-Sino trade tensions after President Donald Trump's insistence of late to blame China for the spread of the pandemic and Beijing's fresh crackdown this week on Hong Kong's democratic rights are other factors that bode well for the bull case in gold.

The Bear Case

Why do you want to buy gold? If it’s because you’re afraid of inflation, then you might want to look elsewhere.

The consequences of the current economic shock, just like those of the last one, are going to be deflationary rather inflationary. When millions of people lose their jobs and their income all at once, then prices go down, not up.

Gold prices may rise when inflation accelerates, although the evidence suggests inflation has to rise a lot faster than it has at any time in the last 30 years to have any meaningful impact on gold.

The more convincing bull argument for investors is that the expansion of central bank balance sheets has still inflated the price of financial assets, such as bonds, stocks or, in the case of real estate, the right to rental income streams. And central banks have not come close to deflating those bubbles in 10 years since the last crisis.

Even so, since the start of 2009, when the Federal Reserve planted the seed of quantitative easing in the market’s brain, gold’s returns relative to stocks have been miserable.

Gold prices have risen 87% since then, while the fusty old S&P 500, despite being weighed down by old-economy duds, has risen 257%. The Nasdaq Composite, where the cutting-edge wealth-creating technologies of today’s economy are concentrated, has risen 531%. For optimal long-term accumulation, your investments need to create value, not just store it.

Gold’s outperformance in the last six months owes less to inflation, or the threat of it, than to the acute level of uncertainty created, first, by President Donald Trump’s trade policy and, second, by the coronavirus pandemic. As soon as that uncertainty fades, and it becomes possible to see which products, which services and which technologies are demanded by the post-Covid world, then investment capital will revert from flow out of value stores and into value creators.

At that point, gold, without the downside protection of short-term bonds, will become a very expensive hedge against uncertainty. Gold was in a bear market lasting four years from its peak in 2011 to its trough in 2015. In that time it lost more than 40%.

Point/Counterpoint: Gold Bulls Vs. Bears
 

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Comments (16)
Ryan Curtis
Ryan Curtis May 24, 2020 1:56PM ET
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Gold miners and reserves have hundreds billions in uncirculated gold. They can unload this gold and dump the market price any time they want. This is all manipulated, which is why I don’t trade commodities. Look up the amount of gold some of these miners have in reserves. There is no gold shortage. It’s all BS.
Asoka Sinnadurai
Asoka Sinnadurai May 24, 2020 10:13AM ET
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Looking it is going North the next few weeks
Taekeun Lee
Taekeun Lee May 24, 2020 8:39AM ET
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I think the us government currently under a staggering debt is more likely to choose inflation rather than deflation. In this case i agree with the writer that gold can be pricey hedge against inflation. But i have no alternative to gold right now. I will go long for the time being. In the meantime i will find other alternative to gold as Covid and chinese tension gets improved.
Milan Yonjon
Milan Yonjon May 24, 2020 4:58AM ET
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my point of view is bullish scenario
Gilbert Schwob
Gilbert Schwob May 24, 2020 2:28AM ET
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Officiaééy ... the re is NO inflation ... just less goods for a similar amount of money. On one hand, corporations has been buying back their own stocks and on the other, the Frd poored billions in order to avoid the markets collapsing and, in the States, supporting the economy and therefore the  re-election.. Such paces cannot be ppermanent; neither trade wars are. and creation of some reserves are a must. As far as I understand, gold is far more expensive to extract (ab. USD 4,000 p. o.) than ist value on the market. On the other hand there is a drastic change of our economic system: from "man handled" to "robotics". Somehow similar as in the late 1600 when the  steam energy started replacing human energy: far more production with far lkess people and far more security. Presently, economy has to deal with social issues while out politicians still rest on a few  big concerns and industrialists to provide jobs and security.
Ioannis Lazaridis
Ioannis Lazaridis May 24, 2020 2:28AM ET
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Excellent presentation of the present and future social-economic-politic situation . Thank you your article.
Gilbert Schwob
Gilbert Schwob May 24, 2020 2:28AM ET
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Abhishek Khosla
Abhishek Khosla May 23, 2020 8:41PM ET
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bull scenerio
Abubakar Quadri laide
Abubakar Quadri laide May 23, 2020 3:08PM ET
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Don't really understand
Alan Kaid
umadbro May 23, 2020 3:08PM ET
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There are two authors who are presenting arguments for/against holding gold as a safe haven investment. The authors are not making a recommendation; they are just making the cases for each side, and you can determine if gold is right for you.
Berat Arda Dedekoca
Berat Arda Dedekoca May 23, 2020 12:26PM ET
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When someone checks the shocking news transfer times from Jan to May, it is easy to draw each movement of gold moving between 40 USD to 55 USD /ounce MAX .. in other words, it is the best and most favorable item of humankind .. ready to be launched up to 1800s and new era targets of 1900s .. if Russia, China or Turkey do not sell their gold reserves once more, then 1800s are absolute targets for the shining blonde .. best
Imrith Ramtohul
Imrith Ramtohul May 23, 2020 12:26PM ET
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Good as a portfolio diversifier. Allocation should not be too high.
Kevin Mcqueen
Kevin Mcqueen May 23, 2020 12:18PM ET
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The bears do not consider the option of stagflation nor dobthey consider the deflationary impact on the dollar of money printing in excess of GDP. Money isa trade medium and the result of productivity. MMT is academic lunacy.
Jeremy Glasser
Jeremy Glasser May 23, 2020 12:18PM ET
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How they can be blind to that risk, and the also very real risk of Economic Warfare that leads to a loss of the USD as the GRC / Petrodollar is beyond me. It's almost as if pieces like this are designed as culling lullabies. Either high level disinformation, or ignorance. Gold's channel bottom tends to increase by ~30% from major dips in Markets, and it stays there. On the way to the new bottom, the new top can bring 100+%... each time there's a big swing in the last 30-50 years, you can see it jump. Why bother with $2000 when the reality is closer to $3.5-4K. The QE will come home to roost. The Fed is doing exactly what is needed to bleed us dry, and then allow hyperinflation to solve the rest of the globalist equation. BTC has wrecked gold, but gold is shinier in a truly bad scene.
Peter Blocked
Peter Blocked May 23, 2020 12:18PM ET
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Yup. MMT might work in theory but not in practice. Taxes are never raised to off set the inflationary impulse. How did MMT work with Zimbabwe, Argentina, and Venezuela? Not too good.
Vernon Orim
Vernon Orim May 23, 2020 12:18PM ET
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I think even Geoff had a hard time arguing bearish on gold tbh
Tom Martin
Tom Martin May 23, 2020 10:58AM ET
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i vividly remember the inflation of the 1970's and the resulting gold/silver mania. 95% of the people were in a panic while eggs, bread, and gasoline prices went up every week. few people realize that during this time, fortunes could be made in gold, silver, quality rental property, quality 2nd homes in great locations, etc. my grandparents had a 2nd home in Eagle River Wisconsin which we sold for $35,000 after they passed away in the late 70's.  oh my, now it's worth $1.8 million.   ohhhhhhh  (regret)
Ufhh Jvhb
Ufhh Jvhb May 23, 2020 10:58AM ET
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Ufhh Jvhb
Ufhh Jvhb May 23, 2020 10:58AM ET
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Kaung Moe Yan
Kaung Moe Yan May 23, 2020 7:53AM ET
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Hello
Reza Sahraeian
Reza Sahraeian May 23, 2020 6:01AM ET
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and how come it will be deflationary rather than inflationary while Fed has already printed mony way more and is ready to continue?
Jesse Rohland
Jesse Rohland May 23, 2020 6:01AM ET
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Look at 2008 financial crisis, gold spiked initially then dropped 35% before continuing it's uptrend.
Tom Martin
Tom Martin May 23, 2020 6:01AM ET
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Frederic Martin
Frederic Martin May 23, 2020 6:01AM ET
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Jesse Rohland already got this liquidation break in march tho
Space Lord
Space Lord May 23, 2020 4:53AM ET
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Bulls vs Bears. Me vs me.
Dizzle TheRizzle
Dizzle TheRizzle May 22, 2020 8:45PM ET
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Ya i have to say this article sure does think that we arent headed into a recession.. maybe the loss of 35mil+ jobs would help you think otherwise? And yes gold was in a bear market after the end of the last recession because there were safe places to put your money because when you bought stocks those companies were making money..
Barani Krishnan
Barani Krishnan May 22, 2020 8:45PM ET
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Like what you have for a brain, Lawrenti?
Lawrenti Berija
Lawrenti Berija May 22, 2020 8:45PM ET
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, take it easy. "Barani Krishnan says the Federal Reserve’s unlimited ability for monetary stimulus will be enough to take gold to new heights" that sentence - modified in that way - says everything one need to know. . The rest of the article is smoke and mirrors....
Piet Delaney
Piet Delaney May 22, 2020 6:31PM ET
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the money supply is sure growing fast.
Space Lord
Space Lord May 22, 2020 6:31PM ET
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Printing money 7/24 next several months
 
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