Australian gold price hits record high. Too late to buy?
Coronavirus is causing some peculiarities in global markets.
Gold prices rose sharply today, putting US dollar gold prices at a seven-year high.
Australian gold prices though, helped along by a sickly Australian dollar, hit a new all-time high of almost $2,800 per ounce, then pulling back to around $2,675 at the time of writing.
But as you may be able to tell from the chart below, today was no ordinary day on the market.
To help work out whether gold is a buy or if that ship has sailed (or if it is yet to arrive), let's look at the reasons for the rise and then the reasons for all the market weirdness today.
A bunch of stuff
The rise was led by a cavalcade of news, triggered mostly by coronavirus.
One key trigger was the proposed US$6 trillion coronavirus stimulus package from the United States, which spurred some fears of currency devaluation.
“We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policy makers act to accommodate shocks such as the one being experienced now,” said Goldman Sachs analysts.
- In other words: When people are worried about currency debasement, they traditionally turn to gold. The prospect of trillions of new dollars entering the economy has people very worried.
Among the package is a multi-hundred-billion dollar Federal Reserve purchase and lending program, which will see the central bank buy up treasury bonds and mortgage-backed securities to help boost liquidity in the markets and keep the wheels of the global economy turning.
In doing so, it may staunch some of the gold selling that's repressed the markets recently.
- In other words: Everyone needs US dollars, especially in times of trouble. The recent gold decline was caused by everyone selling gold to get those dollars. The Federal Reserve is adding more dollars in the right place to potentially tip those scales back the other way.
These kinds of quickly-changing factors are seeing analysts setting ever more ambitious price targets for gold. Someone could understandably look at these factors and decide it's a good time to buy.
On the other hand...
Today was an unusual day for gold prices, which could see prospective buyers hold out longer for more clarity in prices.
Gold mines and refineries have started slowing and closing due to virus fears, which puts a dent in supply, while there are concerns that travel restrictions may prevent the delivery of gold to fulfill futures contracts.
As a consequence, today we saw a large disparity of about 4% between London spot and New York futures prices.
Basically, there was a lot of metal in London but not enough in New York, so prices in New York ended up skewing higher. This price disparity started freaking people out, so trading slowed.
As a result, the New York exchange operator CME has started pushing for a change of rules to permit the settling of futures contracts with the "gold on paper" that's held in London, instead of usual gold bars.
This has resulted in some market commentators airing concerns about a potential physical gold shortage and the prospect of more "paper gold" distorting prices.
If nothing else, it just goes to show that these are unpredictable times.