ASX gold stocks have been on a tear and the sector is likely to remain well supported as the price of the precious metal is forecasts to hit a record high of US$2,000 an ounce in the next 12-months.
The bullish prediction comes from Joe Foster who is the portfolio manager at VanEck – the world’s largest gold exchange-traded fund, reported the Australian Financial Review.
The gold price couldn’t muster enough momentum to reach that price barrier after the GFC when it peaked at a little over US$1,900 an ounce.
But Foster highlights four reasons why it can this time round.
Gold’s 4 tailwinds
The first is the US$9 trillion ($14 trillion) in stimulus that central banks and governments around the world have pumped into the economy to soften the COVID-19 blow.
If the record amount of stimulus triggers an inflationary cycle or if the impact from the coronavirus is worse than expected, gold could even head north of US$2,000 an ounce, Foster told the AFR.
The second tailwind for gold is its ability to protect investors from any short-term deflationary shock that’s triggered by the COVID-19 pandemic.
Works as an inflation and deflation hedge
Interestingly, gold is about the only asset that can also protect against inflation. If inflation does rear its ugly head due to the massive liquidity injection, the gold price will outperform.
Finally, ballooning sovereign debt from the stimulus is likely to devalue fiat currencies. This loss of faith in paper money is anther boon for the gold price.
The ASX gold stocks shining bright
For these reasons, Foster allocated around 20% of his portfolio to Australian gold miners. He commented that the drop in the Australian dollar rejuvenated the industry and prompted greater exploration activity.
Foster’s views follow my article on April 16 when I outlined reasons why the gold price will break new highs.
The tailwinds supporting the commodity are unlikely to reverse or ease anytime soon. If anything, they can persist for the next few years.
This is why I have been recommending investors go overweight on the sector even as we recover from the coronavirus disaster.
While the yellow metal tends to outperform during a crisis, history shows that it keeps running well into the recovery phase.
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Motley Fool contributor Brendon Lau owns shares of Evolution Mining Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.