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A few weeks ago, we noted that when gold shines the brightest when the chips are down, and once again, the precious metal proved its mettle as a safe-haven asset.
It is interesting to compare gold’s reaction to the latest COVID-19 news as the price bounced off a nearly three-week low, to Bitcoin, which is down more than 7% Friday, falling below $55,000 per token.
Fear of a new COVID-19 variant is prompting the latest bout of panic selling in risk assets. Although there is still not a lot known about the new variant out of South Africa, there are fears that global economic activity will be curtailed as governments implement new lockdown measures to stop the spread of this new version of COIVD-19. Already we have seen countries around the world, including Canada, impose travel bans on South African and six of its neighboring countries.
Not only are economists concerned about a slowing global economy, but any new lockdown measures will add further problems to the current supply disruptions. In other words, there is a growing risk of stagflation.
Although gold appears to be well supported in the new environment with the unknown COIVD-19 risks, the precious metal still has a lot of damage to repair after Monday and Tuesday’s massive selloff.
COVID Fears, wage inflation will support prices next week
Personally, I didn’t really understand why gold dropped back below $1,800 an ounce after Joe Biden announced that he would nominate Jerome Powell to remain as Chair of the Federal Reserve. Yes, maybe Powell would not be as dovish as Lael Brainard, the other person under consideration; however, Powell is not a screaming hawk.
With inflation on the rise, it is not surprising that the Federal Reserve is looking to tighten its monetary policy a little sooner than the end of next year. The pace of tapering could also speed up, but that still doesn’t change the current environment.
This week I had a chance to talk with Jeff Weniger, head of equity strategy at WisdomTree and he made an interesting observation. No matter how much the Federal Reserve tightens, they will undoubtedly remain behind the inflation curve, meaning real interest rates will remain low, a positive environment for gold.
For now, we will continue to wait and see how the new COVID-19 threat plays out, but it is clear central banks around the world are not going to rock the boat if the economy is at risk.
By Neils Christensen
For Kitco News
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