The recent rally in equity markets has put some pressure on gold investors who are wondering if the precious metal can compete with improving investor sentiment. However, one precious metal firm said that high equity valuations could be a positive for gold prices.
German precious metals firm Heraeus said that a correction in equity markets will once again make gold an attractive as a safe-haven asset. The analysts, in their latest research report, noted that the rally in equity market does not reflect the true health of the global economy. They noted that the World Bank expects to see the global economy contract 5.2%, the worst downturn in recent history.
“Certainly, lockdowns are being eased and central banks and governments have pledged huge sums of money to support their economies. However, the economic recovery will take quite some time and stock markets do not seem to be anywhere near close to reflecting the damage this will inflict on companies’ profits,” the analysts said.
Stocks are overbought and are very over-valued, so another stock market sell-off is possible which could help to propel gold higher,” the analysts added.
The precious metals firm noted that gold prices have held up fairly well in the face of a 40% rally in equities from the March lows.
“The gold price made new highs for the year in April and again in May, whereas bond yields did not fall to new lows and the yen did not strengthen past its March highs,” the analysts said.
The analysts said that the only factor that could hurt gold’s rally is another liquidity event similar to what happened in March as equities saw unprecedented selling pressure.
“If market liquidity dries up, as happened in March, then gold, as a liquid asset, could be sold off again,” the analysts said. “Whatever happens, gold is likely to continue to outperform.”
Looking at silver, the precious metals firm said that prices need to break resistance above $18 an ounce to attract new momentum.
“The price needs to make a new high for the year to show that the rally is more than a rebound from very oversold conditions in March,” the analyst said.