Whenever the world is faced with an economic crisis, investors quickly turn all their attention to the gold market—and the coronavirus recession has been no different.
Despite governments doing everything they can to prevent a repeat of the 2008 financial crisis, we’ve found ourselves in the middle of another economic recession due to the global economy being forced to shut down because of the pandemic.
During the coronavirus recession, investors have flocked to gold markets in an attempt to secure their wealth. The price of gold is soaring in the world’s commodity markets. A troy ounce is now worth $2,000. The price of gold has spent more than 3 weeks above the $1,900 level; this is the longest the price of gold has consistently stayed this high since 2011. This year the value of gold has risen by 20%.
Impact of COVID on Global Markets
The coronavirus pandemic has taken a toll on the US dollar. The pandemic, and the geopolitical friction between the US, China, and Middle Eastern countries, have all hiked up the price of gold.
The value of other financial assets like government bonds has also increased as interest rates plummet. The pandemic has forced governments of major countries to release stimulus packages to keep their economies afloat. As a result, the returns on government borrowing have also decreased. The US 10-year Treasury notes’ yield also dropped to 0.52%.
Plummeting Oil Prices
Countries going into lockdown had a direct impact on global oil prices. Experts believe that the collapse of oil prices is bound to have consequences that impact the industry for years to come.
In response to the fall in oil prices, the Federal Reserve is looking to boost market liquidity in a desperate attempt to revive the US economy. This is expected to further drag down returns for debt-based securities.
At times of financial crises, economists are quick to shed light on the rise of gold markets when inflation increases and returns on government borrowings plummet.
Whenever the world’s financial markets are hit, gold markets protect investment portfolios by serving as a hedge.
Although the invention of successful vaccine can put an end to the pandemic, it could take a year or more for financial markets to recover fully.
Inflation is expected to rise again in 2021 as the pandemic regresses, turning investors toward gold markets.
Investing in Gold
Previously, some predicted that gold markets would quickly reach their peak, but the World Gold Council claims that capital inflows in gold commodities rose to a staggering 734 tons in the second half of 2020. This happened despite the fact that the consumer demand for jewelry plummeted in the Arabian Gulf and India, where it’s always relatively high.
The increase in gold investments led economists to ponder whether swap dealers (SDs) will be able to offer physical assets if investors decide to exchange their commodities.
As yields continue to fall, and the global economy struggles to stabilize, the price of gold is expected to increase even more.
While the coronavirus pandemic propelled the rise of gold markets, the price of gold has been climbing steadily since 2018.
Why are Gold Prices Increasing?
In August 2020, gold closed at $2,052 per troy ounce; this is a 72% increase since the fall of 2018 and a 35% rise YTD.
The coronavirus pandemic sent investors looking for security, which is why they turned to gold markets. During times of economic volatility, investors always look toward precious metals. The US has officially entered its third-wave of the pandemic, crossing the 10 million mark in November 2020. Hospitalizations are once again on the rise, and there is an ongoing discussion about the need for another lockdown in an attempt to curb the number of cases in the country.
Investors must find ways to protect their funds—that’s why the gold market is so useful. It gives investors something tangible with value that lasts.
Even investors who aren’t usually fans of the gold market have been forced to rush to it because of the stability it offers in times of great financial uncertainty. Between April and June 2020, the US economy decreased by a shocking 9.5%.
Since recovery efforts have clearly failed and infections are soaring, health experts claim that widespread shutdowns may be the only answer to controlling the pandemic, causing economists to believe that the economy will take another hit.
Gold markets offer investors a safe haven; they have the momentum to reach new heights and give investors the protection they need to survive the coronavirus recession.
Here’s why gold flourishes in times of economic uncertainty:
The demand for gold has always increased during financial crises, specifically when equity markets take a hit as they did at the beginning of 2020. Even before major countries went into lockdown, the price of bullion was the highest in 7 years in the US, proving that people’s anxieties are enough to push them toward gold markets. It also reflects the lack of faith in financial systems and their ability to survive a floundering economy.
Like other precious metal markets, gold is unaffected by the rise of inflation. The price remains stable, and its value doesn’t really decrease because it has a steady supply.
The Fall of the US Dollar
Whenever the dollar depreciates, investors outside the country purchase it. The depreciation of the dollar also makes it easier to purchase gold in other countries, causing an uptick in its demand.
In March 2020, the Federal Reserve maintained interest rates close to zero to support financial markets; it reduced borrowing costs to prevent the economy from collapsing. The Federal Reserve also bought billions of dollars’ worth of bonds, which caused a decrease in yields, making the gold market more appealing to investors.
Media is being consumed in more forms today than ever. As the prices of gold shoot up, financial analysts worldwide are reporting on it through various media channels. Widespread exposure to gold market analysis has spiked investor interest, driving gold prices to new highs.
Some financial analysts claim that the price of gold can go as high as $2,500 by the end of 2021; others believe it can reach the target much faster—possibly by the end of 2020! Claims like these have sent investors rushing toward gold markets.
Governments announced stimulus packages to inject liquidity into the economy. Investors that usually invest in stocks, couldn’t do so because the stock market was unstable, interest rates also fluctuating. This instability forced investors to put their money into the gold market, increasing global demand and driving prices up.
Reduced Gold Mining and its Impact on Supply
As with other industries, gold mining was also stopped at the beginning of the coronavirus pandemic, which decreased the supply of gold and drove its prices up.
Lockdowns and travel restrictions have forced gold mining companies in countries like Peru, South Africa, Mexico, and Canada to scale back their daily operations. At the same time, the cost of energy and the currency value of several gold mining countries has also decreased, allowing gold mining companies to enjoy greater margins. Diesel-powered, open-pit mines, for example, are expecting higher profit margins.
COVID-related disruptions are preventing gold miners from operating at full capacity with their usual efficiency, further limiting the supply of gold. The reduction in gold supply has a direct impact on the cost per unit.
Underground gold mining companies in countries where the currency hasn’t depreciated against the US dollar are the most heavily impacted by the ongoing pandemic.
But this doesn’t mean that gold mining companies are suffering globally. Gold mining companies in countries that manage to control the pandemic can continue to work at full capacity and produce their usual quantities. These gold mining firms will be financially stronger than others after the pandemic. Such companies can benefit from the high prices of gold and greater margins.
The coronavirus pandemic isn’t the first time the gold market has prevented the economy from collapsing. To understand how gold protects financial markets, we need to look back at the history of gold and its role in the global economy.
The History of Gold
Gold, wealth, money, and economic power have always been intertwined. Before paper currency was introduced, gold was used to buy and sell goods. The price of gold was set by the government—not financial markets.
In 1971, President Nixon officially dismantled the “gold standard”, and countries were no longer allowed to link the value of their paper currency to gold. Today, gold is a separate commodity; its value isn’t set by any one government but instead by its global supply and demand.
Supporters of the gold standard claim that the economy was healthier when gold was the primary currency because there were fewer deficits and less debt. The idea of limited debt is appealing to some experts, but economists claim that it restricted economic development. In order for economies to grow and thrive, they need the freedom to take out loans.
The gold standard dictates that a country’s development is determined by the amount of gold it produces. If the US still had the gold standard, the federal government would have to mine more gold whenever it needed to fund a project. If that were the case, it would never get anything done—it’s just not practical.
Why Gold Continues to be the Go-To Investment during an Economic Crisis
Time and again, gold has saved investors from losing everything during an economic crisis.
It’s a Hedge Against Inflation
Gold is a completely separate entity; it is unaffected by inflation; therefore, it is seen as a safe and stable investment—especially during economic turmoil.
Even in the past, gold was considered a hedge against inflation. In the 1970s, gold prices increased steadily during a 10 year period; within a decade, its prices went from a mere $35 per ounce to $525 per ounce.
Although many investors look at gold as a hedge against inflation, the correlation between gold and inflation isn’t as strong as many believe.
Economists believe that gold is more of a hedge against an economic crisis than it is against inflation.
It’s a Hedge against an Economic Crisis
When financial markets collapse, the value of bonds and stocks take a hit, leaving investors running around to find a way to protect their portfolio. Gold and stocks aren’t related at all. Unlike stocks, gold maintains its value, making it really attractive for investors during a financial crisis.
It gives them the stability they need during times of financial uncertainty.
It Reduces Fear
Ever since the havoc caused by the 2008 financial crisis, the entire world has lived in fear of another global recession. Since then, every decision made by major financial entities has been heavily scrutinized. When the coronavirus pandemic hit the world, countries that could afford it released stimulus packages to prevent their economies from collapsing.
The fear of another financial crisis is very real. It causes panic amongst investors and prompts them to make quick decisions. From an investor’s eyes, if the worst-case scenario does happen, at least the gold they own will still be worth something.
The value of gold never plunges the way other financial securities do during economic turmoil.