Fed Stimulus, Physical Demand Push Gold Over US$1,650

Gold has surged over the past 24 hours, climbing 11 percent from US$1,498 per ounce to as high as US$1,671, ending a period of liquidation that reversed gains the metal made early in the year.

News that the US Federal Reserve will pump out unlimited amounts of cash to prop up the economy drove up demand for the yellow metal, making gold more appealing as a hedge against inflation.

The stimulus package from the Fed includes a wide array of measures to combat the impact of COVID-19 on the American economy, including lending against credit card debt, student loans and US government backed-loans to small businesses.

The US central bank’s decision to purchase assets such as corporate bonds for the first time has been criticized by analysts, some of whom are outspoken about the Fed’s ongoing quantitative easing.

Economist Peter Schiff took to Twitter to voice his displeasure about the central bank’s announcement, also taking the opportunity to highlight the value of gold.

During the 2008 financial crisis, #gold fell about 25% and took 7 months to make a new high. This time gold only fell about 15%, and may make a new high in under a month. This shows how much greater this financial crisis is, and how much more reckless current Fed policy is.

— Peter Schiff (@PeterSchiff) March 24, 2020

The gold price could also be driven higher by the closure of three of the world’s largest refineries in Switzerland. The refineries, which process roughly 30 to 40 percent (1,500 tonnes) of all gold annually, were closed on Monday (March 24) as the country tries to reduce the spread of COVID-19.

Switzerland’s canton of Ticino, which lies in close proximity to the Italian border, is considered the international hub of refining.

As more cities and countries declare states of emergency and implore people to abide by social distancing rules, the long-term impact on markets is becoming more precarious and difficult to gauge.

A CIBC equity research update released on Monday (March 23) highlights some potential outcomes.

“In the absence of a significant breakthrough in the short term, and if this becomes an extended period of social distancing, the likely outcome is continued volatility and uncertainty in equities, and little upward moves in interest rates,” the note states.

It continues, “We continue to believe gold and gold equities offer an attractive risk/reward scenario — either the recession is extended, or governments further open the flood gates for both monetary and fiscal stimulus. Both would argue for an asset like bullion.”

This sentiment was reiterated during a CPM Group webinar on gold’s performance.

Jeffrey Christian, managing partner at the research firm, pointed out on Tuesday (March 24) that the recent spike in the gold price is being driven purely by physical demand.

“We had seen in 2018 and 2019 extremely low demand for physical metals — gold and silver — from investors around the world,” he said. “There has been a tremendous move into physical metals over the last two weeks, as the economic crisis related to the coronavirus has unfolded.”

The culmination of increased physical demand, a supply squeeze and massive economic stimulus have all contributed to gold’s rapid ascent past US$1,650 today, according to Christian.

As of 1:07 p.m. EDT on Tuesday, an ounce of gold was trading for US$1,605.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.