A major rebound in gold is just around the corner as prices look ready to surge on massive global monetary policy stimulus and unprecedented fiscal policies, UOB said in its latest commodities strategy report.
“Our forecast is for gold to rebound significantly in the quarters ahead to USD $1,650 in 2Q20, $1,700 in 3Q20, $1,750 in 4Q20 and $1,800 in 1Q21,” said United Overseas Bank (UOB) head of markets strategy Heng Koon.
March was a very volatile month for all assets, including gold, according to the Singapore- headquartered bank. But after a temporary drop below $1,500 an ounce, gold has rebounded and is ready for a major rally.
“Going forward, once the USD funding crunch potentially dissipates across 2Q20, massive global monetary policy easing coupled with unprecedented fiscal policy stimulus will light the fuel for further gold strength,” Heng said.
A global recession is coming, which will eventually trigger default risks and increase demand for the yellow metal by reinforcing gold’s safe-haven status.
“Our forecast is for gold to rebound significantly in the quarters ahead … Most global central banks have not only floored rates near zero but many have also entered into large Quantitative Easing programs. These significant stimuli bode well for gold and will be the fuel for gold’s really once the USD funding crunch abates across 2Q,” wrote Heng.
From the economic perspective, the situation is looking very bleak with the UOB forecasting steep recessions during the first half of 2020 in nearly all countries in the world.
“In particular, the U.S., Eurozone, Japan and China are all poised to register sharp growth contraction in 1H. Needless to say as the COVID-19 outbreak intensifies across Europe and the U.S., the prospects of a strong V-shaped economic rebound has diminished significantly,” Heng noted.
This past week gold has encountered a “massive short squeeze for physical gold” as the COVID-19 outbreak reduced air transport and shut down bullion trading centers and refineries.
“This pushed futures price for gold to a significant premium against spot price. The net result for this is also a wider bid-offer spread for gold amidst signs of limited liquidity,” Heng added.
Interest rates across the globe are also expected to stay lower for a long time, which is also very beneficial for gold. But before gold prices can move significantly higher, it is important that the U.S. dollar funding crunch seen in mid-March is completely over.