Gold
Quick History
Currently, gold is 18% below its all-time high set in September 2011 at $1,923. From this peak, it declined by nearly 50% to $1,045 in December 2015. From mid-2013 to mid-2018, gold traded in a tight range between $1,150 and $1,300. There were brief periods when it attempted to breakdown or breakout from this range, but these attempts were quickly faded.
In hindsight, it's clear that this was a healthy period of low-volatility trading in which shares exchanged hands from "weak hands" to "strong hands". Gold had been in a massive bull market since early-2001, and it gained more than 600% over the next decade. Gold's price action over the first part of its bull market from 2001 to 2008 was overshadowed by more extreme action in oil, housing, and emerging markets. However, its bull market intensified following the 2008 Great Recession, the government's aggressive rescue efforts, and the Fed's QE program.
At the time, there was a great deal of confusion around QE, and the consensus was that it would lead to inflation and possibly even hyperinflation. People piled into gold to protect themselves from a bubble in financial assets which ironically fueled a bubble in precious metals. The bubble finally unwound in gold as inflation never materialized, and the Fed was able to remove monetary accommodation without the economy collapsing. Gold's five-year range allowed bullish excesses to be worked off and allowed sentiment to reset.
Looking Forward
The bear case for gold is simple. Economic growth begins to accelerate, short and long-term interest rates move higher, and as a result, the Fed shifts from dovish to hawkish. At the time, this seems unlikely especially due to the numerous unknowns like the upcoming election, the impact of the Coronavirus outbreak, and the continued weakness in manufacturing. Given these variables, it's unlikely the status quo will shift.
Therefore, it's quite likely that the Fed will stay dovish due to these risks and its lack of interest in getting in the middle of a nasty election. Further, it's likely that the Coronavirus outbreak is going to lead to massive Chinese monetary and fiscal stimulus. There's even been talk in recent weeks of the ECB allowing higher deficits due to the slowdown and virus threat.
This combination of fiscal and monetary stimulus is very bullish for gold. It basically means higher inflation and lower interest rates. Traders and investors should look to accumulate gold on weakness in anticipation of these developments.
