Gold Hits All-Time Highs, Then Consolidates

Jeff Clark, Senior Analyst, | Oct 14th 2020, 1:10:31 pm

This quarter’s ITV report begins with an examination of gold’s performance during the third quarter of 2020, along with its year-to-date performance vs. other assets. I’ll also highlight the potential catalysts that seem to grow stronger and stronger. As you’ll see, Q3 was one for the record books, and yet the risks surrounding us point to more records ahead…

This quarter’s ITV report begins with an examination of gold’s performance during the third quarter of 2020, along with its year-to-date performance vs. other assets. I’ll also highlight the potential catalysts that seem to grow stronger and stronger. As you’ll see, Q3 was one for the record books, and yet the risks surrounding us point to more records ahead…


Third Quarter: Gold’s New Record High

Gold made history last quarter, pushing to a new all-time high. On the back of growing Covid-19 cases, a continued flood of Fed liquidity, and geopolitical conflicts that never seem to subside, demand for gold pushed the price into record territory.

Gold hit $2,066.90 per ounce on August 6, forging a new record high close, surpassing the previous record close of $1,904.98 set in August 2011. The gold price then eased off and has since been consolidating.

 Gold ended the quarter up 6.7%. But silver took the prize.

The lower US dollar helped all four primary precious metals log a strong quarter. But the yellow metal set yet another record: it was gold’s eighth straight quarterly gain.

 Silver also had a strong surge into early August, closing at $28.93 on August 6. However, it remains 42% below its all-time high of $50 in 1980.

 Investment demand for gold remained elevated, in some cases surging. As one example, GLD (SPDR Gold Shares ETF) saw its biggest one-day influx this year on September 21, adding a whopping 1.2 million ounces. On a day gold fell by almost 2%.

Palladium’s gain reversed a four month decline. The 10-year Treasury offered zero return, and a negative return on a real basis. Bitcoin (not shown) rose 50% last quarter.

Year-to-Date Performance

Gold and silver remain asset leaders for 2020.

Of the major asset classes, only gold stocks have outperformed silver so far this year. Silver even outgained the high-flying Nasdaq that mainstream investors remain so excited about.

The YTD laggard is platinum, despite its gain last quarter. The US dollar fell into negative territory for the year.

 With silver’s outperformance of gold in Q3, the gold/silver ratio (gold price divided by silver price) fell to 79.5, from 99 at the end of Q2. The historical average ranges between 50 and 55 (depending on the timeframe), so despite the decline the current ratio still suggests silver is more undervalued relative to gold.

Gold Outlook: Coiling for Another Run?

While gold and silver were up for the quarter, both pulled back from their August highs and have since been consolidating. Another way to put it is, they’re coiling for the next run.

How do we know there will be a “next” run? Perhaps the most important thing about the future gold price right now is that it doesn’t center around just one issue; uncertainty persists in most segments of society. Despite a Fed-fueled surge in stock markets and stimulus amounts that could reach to the moon and back, the degree of unease in many areas of society simply hasn’t gone away.

In fact, it’s hard to look at the horizon and not see numerous risks—and thus numerous catalysts—for gold over the coming years…

US Election. While elections are usually political lightening rods, next month’s promises to be tumultuous. Both parties pledged they won’t agree to a winner if the results are close, something that will only increase uncertainty. Reactions from the opposing party once a winner is declared could spark further unease. While each party claims the other would be worse for the markets, gold appears to be the safest bet.

Social Unrest. Protests and riots, particularly in the US, have persisted, leading to extreme calls like “defund the police” that would promise disaster if enacted. One insurer was quoted as saying the damages have reached “catastrophic” levels. It’s also led to a noticeable exodus out of many large cities. Perhaps the most apropos sign of social unrest was the U.S. Department of Justice declaring New York City, Portland and Seattle as “jurisdictions that permit anarchy.”

US Dollar. Watching the US dollar is important, since it is still comprises the biggest portion of global trade. And it seems no country wants a strong currency, which has arguably made the dollar the most overvalued major currency, something President Trump has made clear he does not want. In the current circumstance, further monetary debasement appears unavoidable, what would be a weight on the world’s reserve currency, even if the index rises at times.

Coronavirus Fallout. Mass layoffs, plummeting consumer spending, and widespread business shutdowns show the pandemic continues to wreak havoc on the economy. To put last quarter’s GDP decline of 9.5% into perspective, GDP had never fallen more than 3% in any quarter since record-keeping began in 1947. A vaccine would help, but admittedly a lot of damage has been done that isn’t easily reversible.


Meanwhile, the virus rages on. Global deaths crossed the one-million mark at the end of September, with total cases reaching 33.5 million. In the U.S. there were 205,000 deaths at the end of the quarter, while cases have surpassed 7.1 million.


Monetary Stimulus… World central bankers seem to think there is no logical limit to monetary intervention. The Fed balance sheet is perhaps the #1 driver of gold prices this year—and the current budget deficit, already a record, has yet to be funded.

And now the US Treasury has hinted it may lend directly to borrowers. This would represent a watershed moment, even though it’s technically illegal for the Fed to do it—but so was buying corporate bonds! Direct lending would represent a new weapon in the Fed’s arsenal, one that would arguably speed up their goal for more inflation.

We’re reached a point where there are now so many liquidity programs, most of which are complicated to understand, that it’s hard to quantify the amount of currency being thrown at the global economy. We don’t know where this ends, but the trend is clearly bullish for gold.

… And Fiscal Stimulus. As the quarter ended, US politicians had still not agreed on the next stimulus package, though it almost certainly will be measured in the trillions of dollars.

Meanwhile, US Treasury data show that total government spending in fiscal 2020 had reached $6.1 trillion by August 31, a never-before-seen amount. The 2020 budget deficit now stands at $3 trillion, also a first, and means the government has spent $3 trillion more than it has taken in this year. The current budget deficit is now almost twice as large as the previous highest deficit in fiscal 2009.

Real Interest Rates. US Treasuries, regardless of duration, pay no real yield after adjusting for inflation. At the end of the quarter the benchmark 10-year Treasury cost investors as much as 100 basis points. This vastly lowers the opportunity cost of gold.

Vulnerable Stock Markets. All three major U.S. stock indexes rose in Q3, pushing stock valuations to overpriced levels by almost any measure. In the same breath one must ask… to what extent does the Fed intervene again when the markets have their next correction or crash?


Central Banks. As a group, central banks were net buyers of 8.4 million ounces of gold during the first seven months of this year, compared to 15.8 million ounces through August 2019. While lower, this amount remains above average on a historical basis. CPM Group forecasts central banks will buy 10.5 million ounces in 2020, which compares with net purchases of 17.3 million ounces in 2019. The consultancy reports the two primarily reasons for the decline in purchases is 1) sensitivity to higher gold prices and 2) fewer central banks buying. However, it and several other banks project higher central bank purchases in 2021.

The Hard Asset Answer

The circumstance of artificially low rates combined with ballooning fiscal deficits, extreme monetary creation, and inflated equities creates a veritable utopia for gold. The uncertainty surrounding the Fed’s diminishing ability to respond to crisis only adds to the importance of holding gold going forward.

The most likely path ahead is one that is not just supportive of higher gold prices, but one where gold offers a financial safe haven to those with meaningful accumulations.

As we move into the final quarter of this tumultuous year, gold is increasingly likely to serve as a hedge of absolute necessity, particularly in light of the Fed’s extreme dovish stance, ongoing geopolitical conflicts, and the risks associated with the virus, bloated stock markets, and cantankerous US election.

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