(Kitco News) With the Federal Reserve’s response to the COVID-19 crisis, gold prices are likely to near $1,900 with the potential to go up as high as $3,000 an ounce, according to Edison’s latest gold report.
This outlook is based on the projections that the coronavirus crisis is a protracted one and the Federal Reserve’s balance sheet either stabilizes or continues to increase, Edison’s Investment Research director Charles Gibson said.
“With the total U.S. monetary base now at US$5.1tn (and given the close historical correlation between the two), the gold price could very reasonably be expected to rise to US$1,892/oz and potentially as high as US$3,000/oz,” Gibson wrote in the investment research company’s gold report.
Supporting gold at the moment is a combination of factors, including money printing, aggressive bond buying, COVID-19 lockdowns and economic crisis.
The report makes a comparison between the current negative interest rates in the U.S. to similar volatility in interest rates between September 1979 and October 1980, the time to which Edison refers to as gold’s “first great bull run in the period of flat money”.
The Fed’s actions in response to the coronavirus crisis are the key that could take gold above $3,000 an ounce, according to Gibson.
“After cutting interest rates to (effectively) zero and initially saying it would buy US$700bn in bonds, on 23 March it took off all the brakes and made the programme open-ended saying it will ‘purchase Treasury securities and agency mortgage-backed securities in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy’,” he wrote.
To make its price predictions, the report uses the historical gold price correlation with total U.S. monetary base, noting that the latter has expanded 58% in eight months.
“The reason this is significant is because, since 1967, the price of gold has shown an extremely strong (0.909) correlation with the total U.S. monetary base,” Gibson said. “The more dollars that either are, or could be, in circulation, the higher the expected gold price.”
Source: Anna Golubova | Kitco News
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