What a drop! On Monday (Nov 9), the price of gold (London P.M. Fix) plunged almost 4 percent, or 74 dollars from $1,941 to $1,867, as the chart below shows.
What happened? Well, on that day Pfizer announced a promising vaccine breakthrough, saying that that the vaccine it is working on with German biotechnology company BioNTech, could prevent more than 90 percent of infections. It is, of course, very good news for the world, if proven to be true. We don’t know that yet, as Pfizer hasn’t provided any detailed scientific data, so it’s all based on trust, and the announced results are just interim results – the trial will continue into December. Moreover, it will take some time to make the vaccine satisfactorily safe and widely available (and to convince people to get it). As Christine Lagarde, ECB President, reminded this week, “While the latest news on a vaccine looks encouraging, we could still face recurring cycles of accelerating viral spread and tightening restrictions until widespread immunity is achieved”.
Hence, although the news is a reason for optimism, it should be a cautious optimism and not euphoria – there is still a long way to go before we return to normalcy (although it might be a ‘new normal’, not a pre-pandemic business as usual).
Nevertheless, equity investors welcomed the news. The stock indices soared. Well, it’s not surprising, as the prospect of a vaccine is a light at the end of the pandemic’s tunnel. Actually, it’s our only hope for beating the coronavirus and returning to normalcy. The vaccinations would mean that social distancing, lockdowns, and all the sanitary requirements that drag down social life and economic growth would no longer be necessary. The epidemic would be finally over.
Implications for Gold
What does the vaccine news imply for gold prices? Does it mean the end of the bullish trend in the gold market? Not necessarily. Of course it’s true that the pandemic greatly contributed to gold’s excellent performance in 2020, and the fact that investors are starting to consider an end to the pandemic is clearly negative for safe-haven assets such as gold.
However, the upward trend in the gold market started in 2019 (well before the pandemic) due to the dovish Fed’s monetary policy. The pandemic only accelerated gold’s journey north. Actually, gold reacted in a very bullish way not to the pandemic itself but to the monetary and fiscal response to the coronavirus. Therefore, the bull market should last as long as the US monetary policy and fiscal policy remain ultra-dovish, while real interest rates are likely to stay below zero sometime after the pandemic is over.
What’s important here is that the vaccine news doesn’t significantly change the macroeconomic outlook. Economic growth remains fragile, the central banks will remain accommodative, and the financial stimulus will finally arrive, adding to the already mammoth public debt.
Please just take a look at the chart below, which shows the number of new Covid-19 cases. As one can see, the epidemic is clearly getting out of control. It will negatively affect the economic growth in the last quarter of 2020, thereby spurring fresh actions of the Fed and the Treasury.
Surely, the vaccine news did affect the markets. It encouraged more risk appetite, so investors sold some governments bonds, which increased the bond yields as the chart below shows.
The real interest rates rose, hurting gold prices. However, we are skeptical whether we’re observing the return of interest rates to normalcy. In November the Fed paused, but it’s likely to provide more accommodation in the future, putting downward pressure on interest rates. The same applies to the ECB. As Lagarde said this week, the vaccine news would not stop the central bank from loosening policy in December. Hurray! Hence, from the fundamental point of view, the recent plunge was just a setback, not the end of the bull market.
The lightly edited article above first appeared on Sunshine Profits. To sign up for free visit:
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