Our ITV report examines gold’s banner performance during the second quarter of 2020, along with year-to-date performance. We’ll also look at the Fed’s impact on gold, the gold/silver ratio, and the outlook for the second half of the year. It was a history-making quarter, with numerous catalysts still on tap, so let’s dive in.

Second Quarter Performance

Gold’s selloff in March led to a strong rebound through mid-April, the price jumping $268 within three weeks. It then traded mostly range-bound until the last week of the quarter, when it spiked again to end Q2 at $1,783.58, up 12.6%.

Here’s how precious metals performed in the second quarter, along with other major asset classes. It was a banner quarter. Gold ended Q2:

• At the highest quarterly closing price in history.
• At the second highest monthly close ever.
• With the strongest quarterly performance since Q1-2016.
• And now has risen three consecutive months and six consecutive quarters.

Bitcoin was a standout, jumping 41.9%. Silver saw a strong rebound, rising 28.1%. As can be seen, many asset classes rebounded sharply in the second quarter, after the horrific selloff in March. Crude oil logged its biggest quarterly gain since 1990, while the S&P 500 saw its biggest quarterly advance since 1998. Palladium dropped sharply, and has now fallen four consecutive months. The ten-year Treasury offered near-meaningless returns.

2020 First Half Performance

Bitcoin and gold are among the strongest leaders so far this year. Gold is up 17.1% through the first half of 2020. Bitcoin led the pack with a 27% return. Most other assets, despite the bounce in Q2, remain underwater, the Nasdaq and ten-year Treasury the only major exceptions.

I’ll also point out that the average gold price in the first half of 2020 was $1,644. This stands close to its highest annual average on record: $1,669 in 2012.

The Fed as Gold Driver

The Fed’s “unlimited liquidity” mandate is not only still in play, but was expanded last quarter to include the purchase of individual corporate bonds, even junk bond indexes. This on top of the recently established “Main Street Lending Facility” shows there is little hesitation by the Fed to remain passive.

Minutes from its June 9-10 meeting stated it expects to continue with “highly accommodative monetary policy for some time.” The various machinations of quantitative easing have pushed an increasing number of investors into gold.

Meanwhile, the Fed funds rate remains near zero. Most Treasury rates can’t match even low inflation, which diminishes the argument against gold due to storage costs. In fact, the “real” rate on the ten-year Treasury yield (after inflation) has steadily fallen for 18 months or so, and at the end of Q2 was solidly below zero. Gold remains an ideal fixed-income alternative in a low to zero rate world.

Silver’s Undervaluation

It’s hard to look at the precious metals space without noticing the historic levels in the gold/silver ratio (GSR). As we pointed out last quarter, it spiked to 123.5 on March 17, a huge jump over its prior record high of 100.8 in 1991.

Despite silver logging a 28.1% gain last quarter, the GSR (gold price divided by the silver price) remains at historically high levels. The ratio ended the quarter at 99.08, a reading that is clearly overstretched. The value offered by silver, relative to gold, is hard to overstate.

Gold Outlook: High Prices, But Bigger Catalysts

One could be excused for wondering if gold can maintain its pace, but how many of the risks that pushed it higher in the first place are gone? Check out the risks that remain around the world, and see if it’s really time to reduce exposure — or, instead, make sure one has enough ounces.

• Coronavirus Second Wave: New cases have surged, with Texas reporting all-time highs last month, and California at record highs in hospitalizations. Though not all, other countries continue to struggle as well, with Australia reporting their largest one-day increase in late June. This could impact Q2 and even Q3 earnings more than Wall Street traders anticipated. Fed Chair Jerome Powell was quoted as saying the outlook for the world's biggest economy is “extraordinarily uncertain,” and will depend on both containing the disease and the government's efforts to support the recovery. Greater than expected economic fallout would boost safe-haven demand for gold.
• Real Interest Rates: The direction of real interest rates may be debatable, but when they’re at or below zero gold’s position is arguably more compelling than bonds. With most bond yields only slightly higher than cash yields, gold offers strong appeal.
• Unemployment: Ugly unemployment numbers could worsen if the second wave of the virus can’t be contained. Already, payouts to jobless in the US exceeded a record $100 billion in June, after $93.6 billion in May. Even stalwart Apple (AAPL) began to re-close of their stores in US coronavirus hotspots.
• Recession: The IMF lowered its 2020 economic growth forecast, projecting the world economy will fall nearly 5% this year, a downward adjustment of 1.9 percentage points from its April forecast. “The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.” 
• Monetary and Fiscal Stimulus: World central banks and governments have already embarked on unprecedented levels of monetary intervention — the Bank of England added to its bond-buying program and the US senate passed an extension to the small business loan program — but if economic data don’t improve, there could easily be more stimulus coming. These efforts might help in the short-term, but what are the medium and long-term impacts? Years of easy monetary policy have already driven yields to near zero, so it’s fair to question how much ammunition is left in the Fed’s toolbox.
• Commercial Real Estate: Store closures, unemployed renters, and weakening property prices have led to a surge in redemptions from many commercial real estate funds. It leaves this normally strong segment of the property market vulnerable, despite low borrowing rates.
• Public Debt: In June, the US Treasury’s public debt exceeded $26 trillion, what amounts to 120% of GDP. This level is not sustainable, yet few viable solutions exist.
• US-China Trade Deal: There has been some confusion about the US-China trade deal, in the midst of which Trump talked about “decoupling” from China, and saying he was “more and more angry at China.” Throw in the fact that China sees the US stance on Hong Kong as interference in its domestic affairs, and geopolitical conflicts show no signs of letting up.
• Vulnerable Stock Markets: Stock valuations have rebounded to the extent that investors, in most cases, must now pay a premium. Risk management of stock portfolios has gotten complicated.
• US Presidential Elections: While not until Q4, the rhetoric is already heating up. A number of analysts have stated that a win by Joe Biden could serve as a catalyst for gold, since it would introduce uncertainty in U.S. policies.
• Physical Demand: I’ll conclude by pointing out that the surge in physical demand we highlighted last quarter eased off to more normal though still elevated levels by the end of Q2. Product availability improved, premiums softened, and delivery times shortened. However, most dealers still report above average volumes, with scant few claiming the industry is “back to normal.” Bottlenecks in refining and transportation will easily return once demand spikes again.

The Hard Asset Solution

While gold price performance has been strong, numerous outside risks continue to surround us, many of which are directly supportive of ongoing strength in gold. Indeed, the structural and protracted nature of economic, monetary, and political challenges facing the US and the world aren’t ones with easy or simple answers. 

The most likely scenarios all suggest that the gold price will not only rise, but offer financial safe haven to those with meaningful accumulations.

As we move into the second half of 2020, gold is increasingly likely to serve as an effective and necessary hedge, particularly in light of the Fed’s dovish stance, ongoing geopolitical conflicts, and the risks associated with the recession, stock market volatility, and US election.