Here’s why the largest U.S. bank is bullish on gold prices

May 21, 2020 - Michael Harris

• The unprecedented monetary and fiscal measures will lead towards the currency debasement, warns JPMorgan
• The yellow metal is likely to benefit from this process, as well as the Japanese yen
• Gold prices are trading 1.5% lower today after printing the 8-year high on Monday

Following the month when the largest monetary and fiscal packages in history were unveiled, the U.S. banking giant JPMorgan Chase & Co believes there’s only one winner going forward, and that’s gold prices.

Fundamental analysis: Currency debasement coming

In the latest report published by JPMorgan, the bank’s analysts John Normand and Federico Manicardi believe that there is an increased risk of the currency debasement in the coming years after the unprecedented monetary and fiscal measures announced globally to tackle the consequences of the COVID-19 outbreak.

Debasement refers to the process where the value of a currency is decreased. By lowering the value of money, governments believe they would have more funds to finance different projects and processes.

Analysts believe that the combination of massive fiscal and monetary stimulus is highly likely to initiate the process of currency debasement and the winner will be gold prices. Despite the fact that debasement is believed to result in high inflation, JPMorgan’s analysts believe that inflation should remain subdued in the next two years.

“Those who see in the major currencies just different shades of the same long-term liabilities should simply remain long the world’s legacy reserve currency – gold,” they wrote in the report.

“If the U.S. continues to suck in capital and fiscal deficits overstate the risks to external financing, the payback via G-10 currencies will be concentrated in those with above average real-rate advantages to the U.S., such as the yen and Swiss franc,” it is noted.

Hence, Normand and Manicardi argue that the Japanese yen may also profit from the debasement of currencies, besides the gold.

Technical analysis: Gold prices retreat from the record highs

Gold prices are trading 1.5% lower today after it was revealed that the Russian Central Bank, believed to be the world’s biggest buyer of gold, hasn’t purchased the yellow metal in April. Still, gold prices look very supported going forward.

Gold (XAU/USD) daily chart (Trading View)

Earlier this week, the buyers forced the gold prices to trade at the highest levels seen since 2012. While a pullback to $1700 is very likely in the coming days, gold prices still look very much bullish as the buyers eye a trip towards the $1,900 handle to complete the bullish pennant chart pattern.

Summary

Gold prices are trading 1.5% lower on the day after printing the multi-year highs on Monday. JPMorgan has warned that unprecedented fiscal measures presented globally are likely to lead towards the currency debasement, with the gold prices as a clear winner.