2020, A Year Unlike Any Other
Spot gold closed at $1,898, an increase of $381/oz or 25.12%, the eighth-best annual return in 50 years. Gold, measured in every currency, made all-time highs by a wide margin. The impact of the global COVID-19 pandemic catalyzed the U. Gold is the primary beneficiary of this Fed action and continues to outperform the market’s main equity and bond asset classes. As this new year unfolds, we see gold continuing to perform well and exhibiting the unique characteristics that will further increase gold’s attractiveness in multi-asset portfolios.
2020 will likely be considered a watershed year in the history books, especially for financial markets. The year began with the broad markets marching relentlessly higher despite signs of an economic slowdown and a malfunctioning repo market . By late January, COVID was spreading unchecked across the globe and accelerating. The global flow of U. Capital markets spiraled into a full-blown liquidity crisis in a matter of weeks.
March COVID Madness
During most of this period, gold worked well as a hedge in times of financial stress except for two weeks in March as the liquidity crisis became so severe that it forced the selling of gold to meet margin calls and collateral obligations. bond market, the largest, most liquid financial asset, malfunctioned badly during this liquidity crisis.
Gold Reaches New $2,064 High in August
With the massive fiscal stimulus, QE Infinity, global U. Globally, there has been an estimated $8 trillion of QE plus another $14 trillion of fiscal stimulus in 2020. By August, gold, measured in every major currency, had reached new highs, with gold in U. As the global money supply surged and central banks’ balance sheets reached astounding levels, real yields plunged along with the U. In the September 15–16 Federal Open Market Committee meeting, the Fed policy framework had a significant move to an «outcome-based forward guidance» and an «average inflation targeting» of 2%. Effectively, this means a negative real interest rate policy. Not only will the Fed policy remain accommodative even after economic lift-off, but it will be asymmetrical as the Fed will only respond to an inflation shortfall .
The implications for gold have been incredibly positive.
An Election for the History Books
After an incredible move in gold bullion, selling began around the September quadruple witching period. election became the overriding risk factor. The broader market had reduced positions and bought expensive «crash-type hedges» in size in anticipation of a chaotic U. election day extending into Inauguration Day. The large quantity of expensive crash protection hedges was then forced to unwind, creating a short squeeze and fueling buying as the market moved higher.
Yearend Marked by Irrational Exuberance
As 2020 closed, broad markets were reaching new all-time highs, valuations firmly in dot-com bubble levels, overbought conditions, put-call ratios at all-time lows and sentiment at euphoria levels. The consensus outlook for GDP growth, inflation, yields, and earnings growth can be best described as «Goldilocks» . The market has looked past the current negative news and to a much brighter future .
Source: Paul Wong | Sprott
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