After pushing into uncharted territory above US$2,000 an ounce, gold faced significant selling pressure last week, closing as low as US$1,921.16. While many were expecting a retraction of some kind in the price of gold, investors witnessed a bizarre twist before the week was over; Warren Buffet’s Berkshire Hathway Inc. disclosed on Friday it had offloaded billions in bank stocks — and taken a US$565 million stake in Barrick Gold Corp., the world’s second-largest gold miner, in the process.
This came as a shock to analysts and market commentators around the globe, considering how long Warren Buffet has railed against gold as an investment vehicle.
“. . .for every dollar you could have made in American business, you’d have less than a penny of gain by buying into a store of value [gold] which people tell you to run to every time you get scared by the headlines,” [Warren Buffet said at Berkshire’s 2018 annual meeting].
Following Buffet’s (apparent) change of heart, gold shot back up roughly 2% on Monday to close at US$1,985.10.
However, even with support from the Oracle of Omaha, the yellow metal faces hurdles ahead. U.S. fiscal policy — a significant driver behind gold’s precipitous rise — appears to be in limbo; the United States’ coronavirus stimulus package ran out at the end of July and American politicians are worlds apart on how big the next package should be.
Partisan Divide in Congress Will Test Gold Bull Market
In a recent episode of the podcast Electionomics, Yahoo Finance’s Rick Newman stated that Republicans want the second coronavirus stimulus package to be US$1 trillion, whereas Democrats want it to be US$3 trillion.
Newman went on to say,
“. . .There might not be anything out of Congress until September, perhaps mid-September, and Congress might not do anything — to me that’s incomprehensible but that’s where this sits right now — which is why Trump has gotten involved. . .”
Newman was referring to how Trump signed executive actions to extend select coronavirus benefits, effectively bypassing Congress. Trump went on a Twitter spree late last week to reaffirm his support for direct payments to Americans.
It’s no coincidence that the price of gold is retracting amidst a partisan divide on the second coronavirus stimulus package. A Mining.com article titled, “Gold price sees worst week since June,” touches on the relationship between the current gridlock in U.S. fiscal policy and the price of gold,
“It could be the case that before the elections, there would be no further stimulus,” Bank of China International analyst Xiao Fu said. “Gold could then be lacking upward impetus that will imply the shorts or the profit-taking side will be winning momentum, pushing gold even lower.”
Gold Has Upside Despite Second Coronavirus Stimulus Package Stalemate
While gold will likely encounter resistance in the months leading up the 2020 United States presidential election, it’s important for investors to remember just how euphoric these past few months have been for gold. Financings on the TSX Venture totalled approximately C$1.25 billion between June and July 2020, the majority of which went to junior gold companies. And while it seems unlikely that a second coronavirus stimulus package will be approved by Congress anytime soon, anything possible these days — just look at Warren Buffet and gold.