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Chief economist update: Gold 2000

Gold prices have already been on the up and up last year, buoyed by major world central banks' about face towards a more accommodative policy - led by the US Federal Reserve's interest rate cuts (July, September and October 2019).

Gold prices surged from US$1282.10 an ounce in January 2019 to a high of US$1552.00/ounce in September before ending the year at US$1515.00 per ounce.

Despite the strong upward momentum, there was nary a whisper of gold catching up with its previous record high of US$1900.30/ounce it set back in September 2011.

The coronavirus pandemic has changed all this. The price of gold has now soared to a new high of US$1964.05/ounce and sparking speculations for a break above the US$2000 mark.

This reminds me of speculations of seven years before.

At the start of the year 2013 -- when gold was fetching around US$1600 an ounce, not a few expected the shiny metal to rally to around US$2000 by year end - US$3000 if they got lucky.

But they're little leaguers compared with those predicting gold US$5000 (BofA Merrill Lynch) and most definitely far, far pessimistic than US Global Investors' forecast for...wait for it...US$46,000/oz made less than a year before.

Perhaps, they've learned their lesson for so far I haven't seen fearless prices forecasts of the kind.

Just as today, the rationales for the continued ascent in gold prices were rational.

Massive amounts of money printing are debasing currencies. When faith in the fiat currency is lost, hard commodities, especially gold, provide a safer haven.

So much so that even central banks are loading up (or plan to) on gold. After buying 650 metric tonnes of the metal last year, Forbes cites a World Gold Council survey indicating that: "Overall, three quarters of all the central banks that responded to the survey thought that global bank gold holdings would increase."

And why wouldn't they?

With interest rates at near-zero, zero, or even negative, the opportunity cost of holding gold is basically nil. The still uncertain outlook brought on by the pandemic could force interest rates lower and for longer.

Low interest rates offer little incentive to hold bonds. Sure, there is no interest payment attached to gold, but it also does not contain the prospect of a fall in capital value should interest rates head even lower.

The massive amount of monetary and fiscal stimulus implemented around the globe could lead to rising inflation - gold's best friend.

All signs appear to point to further gains in gold prices.

Then again, the yellow metal's sharp rally has put it at overbought levels.

Fundamentally, there is very limited scope for interest rates to decline further and that inflation fears are unjustified given the longer-lasting negative impact of the pandemic on consumer and business sentiment.

As with everything else during these trying times, the coronavirus will dictate what happens to gold.

Read our full COVID-19 news coverage and analysis here.

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