Where everything else is falling, Gold seems to pretty tempting
Posted on May 26, 2020 at 12:00 am
History has proved time and again that following major factors have always sent triggers and brought about a rally in gold prices
- Financial market cyclicality
- Economic crisis.
- Geopolitical stress.
- Monetary instability.
Any one of these four factors possesses the power to drive gold prices here. But today, we don’t have to choose — all four are combining to trigger the gold-buying impulse.
One virus was enough to trigger all of the above factors.
Furthermore the extraordinary 12-month gold-price bull run shows no sign of ending. Despite predictions of a bubble set to burst, the yellow metal has risen by 36% during the past 12 months.
Gold prices ended higher on Friday as testiness between the U.S. and China fed risk-off sentiment, drawing investors into assets considered to be havens, including government debt and the Japanese yen.
Further to the above factors, even drivers of money flow into safe haven assets and also support gold. Lately, the gold has been moving majorly due to the following reasons-
US-China tension escalation- The Wall Street Journal on Thursday reported that U.S. senators were introducing a bipartisan bill that would sanction Chinese officials and entities that enforce the new Hong Kong laws, and penalize banks that do business with the entities.
With the crisis in Hong Kong picking up, stock markets in Asia and the U.S. declined, resulting in “safe haven buying for both gold and silver.
The U.S. has threatened a very harsh retaliation if China challenges Hong Kong’s autonomy, which then could lead to U.S. implementing more tariffs. Those tensions aren’t likely to influence gold for long as the market tends to overreact once news hits, but still gold prices are bound to go up regardless of that.
Concern of second wave crisis drove money flow into safe haven assets- the immediate reason gold is finding support came from testimony to the Senate Banking Committee earlier this week by US Treasury Secretary Steve Mnuchin and Jerome Powell, chair of the country’s central bank, the Federal Reserve. According to the Seattle Times, Mr Mnuchin emphasised re-opening American workplaces to get the economy moving again, while Mr Powell suggested more stimulus measures may be needed which is why central banks have been pumping money into the markets.
Supply demand- This time around, the coronavirus is causing interruption on an unprecedented scale, including the supply of physical gold. Three of Europe’s biggest gold refineries are based in the Swiss canton of Ticino. On March 24, cantonal authorities ordered all three refineries to close.
This perfect storm of a strangled supply and soaring demand has led some analysts to speculate that gold prices could reach an all-time high in 2020 – over $1920, which the current high is reached in August 2011.
Except, there’s plenty of evidence that this time is different, and gold could even outperform its previous rallies during market uncertainty. Consider that during previous major stock market crashes, such as the 2008 financial crisis or Black Monday in 1987, there were no other externalities affecting the price of gold, which was purely driven by supply and demand
However, analysts said continuing plans to reopen economies that have been frozen by the COVID-19 pandemic and hope for remedies for the virus have limited the upside in precious metals, sending gold lower for the week.
There was a slight slip on Monday morning as gold prices price lost 1.23% in early trading to stand at $1,735.25 an ounce. But the pattern of recent months has been decisively upwards.
The economic unease caused by the COVID-19 situation has prompted many investors to consider moving their assets into gold. But with the masses all thinking the same thing, what’s the market outlook for the yellow metal?
Interest in the metal has been growing recently in light of the pandemic as one of the safest and most resilient assets for investors. Russia, however, started to build up its reserves long before the crisis emerged.
Russia has become a saviour of the global gold markets as the pandemic has spurred abnormally high demand for the precious metal while it has at the same time also crippled companies' ability to produce gold in the amounts requested by market players
During that fateful mid-March week, gold prices also took a beating as investors fled to liquidate all assets. The price of one troy ounce of gold fell from a high of above $1670 on March 9 to below $1470 nine days later.
If you’d bought gold back in 2018 when it was trading around $1200, that represents returns of 50%. Even at the current prices, the all-time high would provide a return of over 12%. In a market where everything else is falling, those numbers appear to be pretty tempting.
