Gold prices may be struggling the day after the Federal Reserve’s emergency 50-basis-point cut, but according to one market analyst, if history is indication, the yellow metal has plenty of upside.
In a telephone interview with Kitco News, Ryan Giannotto, director of research at GraniteShares, said that the last time the Federal Reserve announced a 50-basis-point inter-meeting cut was back in 2008. After that announcement gold prices embarked on a major bull run, rising more than 17% that year.
“We have seen seven emergency cuts before and gold has rallied on 26% on average during the first two years follow each of those events,” he said. “It would be very unwise to rule out a move to $2,000 by the end of the year.”
Giannotto’s comments come as gold prices see a relatively quiet day holding on to most of Wednesday’s gainds. April gold futures last traded at $1,641.40 an ounce, down 0.18% on the day.
The researcher said that he is very optimistic that gold prices will continue to go higher as a perfect storm is brewing in financial markets. He noted that in the past year the Federal Reserve has embarked on a new easing cycle, the bond yield has inverted and now markets are digesting an emergency rate cut.
“Anyone of these factors would be a bullish scenario for gold and we have now had all three,” he said.
Not only is gold reacting to lower interest rates, which improves the precious metals opportunity costs as a non-yielding asset, but Giannotto also said that the emergency move also throws out any expectation that the U.S. central bank will be able to normalize interest rates anytime soon.
Giannotto said that with the 10-year yield falling below 1.0% there is a strong argument to be made that bonds don’t provide the security they once did. He added that the idea of a 60/40 balanced portfolio, with 60% weighted in stocks and 40% weighed in bonds is no longer relevant.
“Last year you could have sold all your bonds, put that money into gold and you would have seen better risk-adjusted returns in your portfolio,” he said. “We have to stop seeing gold as a mythical investment and look at it as a mathematical asset.”
Not only has the Federal Reserve pushed bond yields into unprecedented territory, Giannotto, along with many other economists, noted that the extreme rate cut is probably ineffective in fighting the effects of the spreading coronavirus.
“The rate cut will make sure the financial system has plenty of liquidity but it’s unlikely to stimulate growth,” Giannotto said. “It can’t address the real problem but it can probably alleviate some of the symptoms.”