The same stock market volatility that has been seen in recent weeks looks set to continue. Stocks lost ground on Monday but have thus far rebounded strongly on Tuesday. As stocks continue their back and forth price action, the gold market has maintained its steady climb higher.
The gold market is now approaching the $1800 level, a target cited by numerous analysts as the next potential stop for the yellow metal as it heads back towards previous all-time highs near $2000 per ounce. The metal is seeing benefit from several factors, including equity volatility, a weaker dollar and ongoing geopolitical as well as economic risk.
Although the infection rate for COVID-19 may be at or nearing a peak, it is still too early to tell just how much damage the virus has done economically. Current estimates by the International Monetary Fund, or IMF, put the damage to the global economy at a three percent annual economic contraction this year to be followed by a 5.8 percent gain next year. The U.S., according to the fund, is set to contract by 5.9 percent this year. Such an economic decline would represent the largest fall since the Financial Crisis of 2008/2009. The U.S. would then see a rebound of 4.7 percent next year, according to the IMF.
The worry over economic damage will be very difficult to quantify until the virus is brought under control. Although there are indications that current stay at home orders have significantly slowed the spread of the virus, there is no telling yet how long the virus may continue its rapid spread while keeping economies shut down. The U.S. appears to be getting ready to discuss the reopening of its economy, but already seems to have issues on who will make the call between President Trump and state governors. Many parts of the U.S. are to remain closed until the end of the month, and any reopening likely will not take place before that time.
Earnings season is now getting started, and many investors will be paying close attention for virus related declines. Current corporate earnings may show some of the beginning effects of the economic shutdown but will likely not show the full extent of the problem yet.
The dollar is also having an impact on the yellow metal. After peaking around the 104 level in March, the dollar has been trending lower and is now trading in the 99 area. Further weakness in the greenback could send the price of gold higher and could act as a major, bullish catalyst for a run to previous all-time highs or beyond.
The U.S. currency may be declining as the Federal Reserve takes massive action and as rates were recently cut to zero again. The longer the economy is closed, the lower the dollar could potentially go.
The next couple of weeks should provide additional clues about the virus and its spread. As more information is provided, stocks could potentially take another run at their March lows while gold could stay on the offensive.