Wall Street Loves A Stimulus Package, But Keep An Eye On Gold In 2021
Never mind a global pandemic, 2020 has certainly been a wild ride for the markets. As we come to the closing months of 2020, we’re going to share why we think you should keep an eye on gold in 2021, as we adjust to what will hopefully be a post-pandemic world.
And if you haven’t already, be sure to read our in-depth report on one of the largest, undeveloped gold-copper deposits in the world – that’s still a junior.
Bullish on Biden?
After a very contentious election, Joe Biden was officially confirmed as the next US President on the weekend of Nov 7th, and markets rallied hard on Monday, Nov 9th – the same morning that Pfizer announced it had developed a vaccine that is 90% effective against COVID-19.
It’s hard to say if the positive reaction from the markets was due to the vaccine or the new president – or perhaps the fact that the US looks set to have a split Congress, which will likely see a Republican-backed Senate block Democrat initiatives such as higher taxes and tighter corporate regulatory reforms. Not to mention that historically, stocks perform better under a divided Congress.
Both parties have also agreed to initiate a stimulus package in response to the resurgence of COVID-19. And as we’ve already seen in 2020, Wall Street loves a stimulus package.
Adding to this market euphoria, on Nov 23rd, as the official transition to a Biden presidency began, it was announced that the President-elect had appointed former Federal Reserve Chair Janet Yellen to be Treasury Secretary. Ms. Yellen, who previously oversaw a long period of economic expansion with historically low-interest rates, is considered by many to be a market-friendly addition to Biden’s cabinet. The same day, AstraZeneca announced that its COVID-19 vaccine showed the efficacy of 70%, following Moderna’s announcement the previous week that it had developed a vaccine that showed 94.5% efficacy, an improvement over Pfizer’s 90%. Stocks have since rallied even higher, with the DOW surpassing 30,000 points for the first time ever on November 24th.
All this market positivity has corresponded with a pull-back in the price of gold, which was trading just below $1,800 per ounce on Nov 27th, in contrast to reaching a peak price of $1,960 per ounce following uncertainty in the days immediately after the inconclusive Presidential election.
A Storm is Brewing
Despite the recent market rallies, the economic outlook is not all roses. With the Democrats and Republicans locked in a dispute over the terms of the new stimulus package – House Speaker Nancy Pelosi is pushing for $2.2 trillion while Senate Majority Leader Mitch McConnell is targeting a more modest $500 billion – progress has been stalled. It’s also expected that any resulting stimulus package will be smaller than what had been anticipated under a “Blue Wave” election outcome.
If there is no consensus on a stimulus package, and it doesn’t pass before the end of the year, the consequences could be devastating – around 12 million workers will lose their unemployment benefits in December, when the CARES Act provisions lapse, unless there is an extension. Many businesses that survived the initial shut-down likely won’t be able to survive a second shut-down without financial aid, meaning many people are at risk of losing their jobs permanently. With no stimulus package they’ll be without any relief, leaving them financially vulnerable at a time when Covid-19 infections are rising and shutdowns are being reimposed.
On top of this, the Center for Disease Control and Prevention’s (CDC) nationwide eviction moratorium that protected renters from being evicted during COVID-19 will also expire on December 31st, after which point landlords will be able to physically remove tenants who have not paid their rent from their homes. According to research by the Aspen Institute, nearly 40 million Americans could face eviction over the next several months.
Mark Zandi, Chief economist for Moody’s Analytics told the Washington Post that tenants could owe nearly US $70 billion in back rent by the end of 2020. There has been little relief for landlords, who’ve been left to subsidize housing for their tenants while having to keep up with their own mortgage payments and property taxes.
Rushing to Gold in Uncertain Times
While markets tend to respond favorably to the extra liquidity that fiscal stimulus provides, over the long-term it can mean a surplus of cash in circulation, which increases the risk of inflation and a weakened US Dollar. Even worse, if that surplus of cash coincides with a lack of economic growth, which is not out of the question during and after a global pandemic, it can lead to stagflation.
Investors have been turning to safe-haven assets like gold throughout most of 2020 for this very reason. On August 6, gold hit $2,070 per ounce, up 35% since the start of 2020 and 40% from the March lows, driven by a weakened US Dollar, civil and political unrest, and worldwide increases in fiscal spending in response to COVID-19.
With the second wave of COVID-19 cases now gripping the world, and multiple countries rolling out additional fiscal stimulus packages to keep their economies afloat until vaccines can be rolled out, inflation is now a very real concern to many investors. Trillions of dollars have already been pumped into the global economy through fiscal stimulus in 2020. According to McKinsey, this year’s stimulus has already exceeded measures taken during the 2008 global financial crisis.
The US dollar has also been falling, while Citibank said in a recent report that the rolling out of a COVID-19 vaccine coupled with loose monetary policy will likely push the Dollar lower next year. The US bank predicts the Dollar could fall as much as 20% in 2021. Back in October, Citibank also released a gold forecast which set a 0-3 month point price target of $2,200 per ounce, and a 6-12 month target at $2,400 per ounce.
Goldman Sachs also maintained their bullish forecast for gold in their recent gold price forecast, setting their price target at $2,300 per ounce in 2021, and citing growing inflation expectations and a weakened US dollar as the reasons.
So, Should You be Adding Gold to Your Portfolio?
Ignoring the analysts’ predictions, the risks of inflation, and the threat of a devalued US dollar next year, gold has historically been recognized as a safe haven asset. We think that despite the markets’ early excitement over a COVID vaccine, this market could develop into one where investors are focused on building a defensive strategy – and alternative assets like gold are a major part of that psychology.
Furthermore, small-cap and exploration companies remain some of the most mispriced asset classes and are known to outperform under these macro conditions. One way to offset perceived risk of future gold prices is to think like Barrick Gold (NYSE: GOLD), which recently announced it was sought out opportunities to gain exposure to copper. Many analysts are very bullish on copper over the next decade as the number of existing producing copper mines cannot meet the rising demand brought on by the global electrification movement. Copper-gold deposits are, in our opinion, a double whammy opportunity in times like these, and can protect you against some of the fluctuations that gold is likely to experience over the coming months.
In highlighting these macro trends, we are compelled by one opportunity that stands out to us for various reasons. Backed by billionaire mining magnates the Lundin Group, who have built some of the world’s most successful mines from exploration to production, this undeveloped copper-gold deposit is about to begin production and is currently trading at a discount. You can read our report here.
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