Big buying opportunity’: Gold price to rebound as U.S. faces ‘lingering damage’
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(Kitco News) Gold might be down but a rebound is on its way and investors should view this setback as a buying opportunity, according to analysts.
Gold surprised investors with a loss of $50 in the span of just two hours on Friday as markets rallied on shockingly upbeat employment news in the U.S.
Hope that the U.S. economy is recovering quicker than expected led to an immediate rally in the stock market. At the time of writing, the Dow was up more than 2.5% after jumping more than 700 points. Gold was sharply down with August Comex gold futures last trading at $1,686.80 an ounce, down 2.35% on the day.
“The COVID premium has probably started to be priced into the market. We had 8-10 weeks of it and it could be falling away into the background,” Rhona O’Connell, head of market analysis for EMEA and Asia regions for INTL FCStone, told Kitco News on Friday. “The employment numbers in the U.S. are going to put pressure on the gold market.”
All of that points to more of a risk-on environment, which is why we are seeing gold come off, O’Connell added.
But has this risk-on optimism ran ahead of itself? Some analysts warned of tough times still ahead. “While we do expect a continued surge in hiring in the coming months, the need for continued physical distancing well into the future suggests there will still be lingering damage in some industries, with the unemployment rate remaining elevated for years,” said Capital Economics senior U.S. economist Michael Pearce.
Many analysts are also questioning just how far this equity rally can go and more importantly whether it can even last.
“Longer term, we still got geopolitical risks as the trade tensions that not gone away. We’ve got underlying risk in the economic and financial environment,” O’Connell pointed out. “Do we know if the recovery in China and the early shoots the U.S. will cascade through to Europe? It is questionable whether the equity markets are reflecting the genuine potential for recovery in the next three-to-six months or whether they have gone too far.”
The rally in the equity space is unlikely to last, said TD Securities head of global strategy Bart Melek.
“This equity surge is a surge only for a little while. At some point, there may be a correction,” Melek said. “The reality is that we will still have massive unemployment, economy will be massively under potential and that means central banks and governments will have to continue to add stimulus. I suspect that central banks will allow inflation to move above 2%. At the same time, we are producing massive amount of debt.”
The U.S. economic recovery will not be smooth and quick. “There will be some structural issues … The first phase of the recovery is the easy stuff,” Melek added.