Fed stimulus is ‘game changer’ for gold and analysts say buy dip

The US Federal Reserve announced an “unlimited QE” program on Monday. (File image)

The U.S. Federal Reserve’s purchasing of unlimited amounts of Treasury bonds and mortgage-backed securities is a potential “game changer” for gold and investors should “buy the dip” in gold miners, according to analysts at two Canadian banks.

The central bank’s actions to stop the bleeding from the coronavirus-driven economic slowdown have been “more aggressive” than during the 2008 financial crisis, Canaccord Genuity Capital Markets analysts led by Carey MacRury wrote Tuesday. He said the policy makes the risk/reward for gold stocks positive.

MacRury, who had previously advised clients to be defensive and invest in larger, liquid producers and royalty companies because of volatility, now recommends they “transition to offense,” even though its potentially “too early to call the bottom,” he said.

Gold spot prices rose as much as 4.7% on Tuesday on fresh waves of potential stimulus measures, which prompted Goldman Sachs Group Inc. to say that bullion is probably at an inflection point and it is time to buy. The NYSE Arca Gold Miners Index surged as much as 13%.

Meanwhile, CIBC analysts led by Anita Soni agreed that recent market events has created a buying opportunity for gold equities.

“Near-zero interest rates, market uncertainty and ongoing liquidity injections, provides a bullish setup for gold and silver,” she said. This has created an “excellent opportunity to buy the dip across the sector.”

To be sure, Covid-19 uncertainties remain a cloud over gold mining stocks, Soni said. But they seem to be less volatile than even a few days ago and there are signs of stabilization as well as a resumption of the correlation between the equities and the commodity, she said.

(By Aoyon Ashraf)

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