Is Gold Gaining Or Losing Favor As Markets Rebound?

May 21, 2020

Gold recently retraced, following a sustained uptick in prices during the coronavirus pandemic. As stock markets sold off en masse, gold hit a price of $1750 per ounce in mid-May.

Gold Bullion Remains Relevant in Midst of Global Crisis

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All that glitters is gold’ with the world's premier go-to, safe-haven commodity. As a financial instrument, gold serves many important roles, notably a hedge against stock-market volatility, a long-term investment option with appreciable returns, and an effective hedge against inflation. Given gold’s limited supply, and the increasing costs of mining gold, people who trade gold are seeing the inherent value in this commodity. While the importance of gold has diminished since the abandonment of the gold standard, gold retains ranking status as an important indicator in the economy.

When the gold price is soaring, it indicates that there are substantial monetary inflows from stocks, bonds, and other sources into gold. These shifting trends have a direct bearing on the performance of the NASDAQ, the Dow Jones, the FTSE 100, the CAC 40, the DAX 30, the JSE, the Nikkei 225, Hang Seng index, et al. While the price-based performance of gold typically moves contrary to the price movements in stock markets, this is not always the case. There are notable examples of gold appreciating or depreciating, in tandem with equivalent directional movements in stock prices. Generally, the two move in opposite directions.

Interest Rate Decisions and Monetary Stimulus Measures

In an era where interest rates have been slashed by the Federal Reserve Bank, the Bank of England, the European Central Bank, and the Bank of Japan, gold demand tends to take a hit. Since gold is not an interest-bearing financial instrument, it cannot capitalize off increasing interest rates since funds will flow into fixed-interest-bearing accounts where the yield is greater.

In an era of near zero inflation, gold pricing also tends to stagnate. Truth be told, there are only short-term knee-jerk reactions to rising or falling interest rates vis-a-vis its effect on gold. Over the long-term, there is no correlation between interest rates and gold since pricing can move in any direction. During the gold bull-run in the 1980s, interest rates were spiraling out of control, yet gold still appreciated sharply in value.

Now that the Fed announced its interest rate decision on April 29, 2020, with an actual rate of 0.25%, the costs of borrowing are near zero. This decision was done in an effort to stimulate economic activity, and to facilitate increased lending to businesses and individuals across-the-board. On 18 May 2020, Fed Chair Jerome Powell spoke with CBS on 60 minutes and stated that the US Gross Domestic Product (GDP) could drop by up to 30% for the second quarter of the year.

This, as upwards of 30 million people claimed unemployment benefits in the country. With a multi-trillion dollar stimulus working its way through the economy, the impact on gold is also obtuse. Stimulus packages are designed to inject liquidity back into the economy, thereby encouraging spending by kickstarting economic activity. Recreation, entertainment, food, travel, and essentials tend to benefit from stimulus packages, not gold bullion.

Interest in Gold is Rising Fast

Source: JM Bullion Gold Price

Nonetheless, business planners and investment consultants routinely recommend shifting resources around; otherwise known as rebalancing financial portfolios. In the midst of the current global pandemic, financial planners have strongly advised a divestment from high-risk stocks such as airlines, travel, tech stocks, pharmaceuticals, start-ups, and the like, in favor of a more balanced (low-growth options) mix including gold stocks, exchange traded funds, and physical gold bullion.

Now that gold is trading at $1,750 per ounce, or $56 per gram, with a 6-month gain of 18.71%, and a one-year gain of 36.77%, there is tremendous interest in this precious metal. It is notable that despite the mid-May rush for stocks, there is substantial interest in gold. Among the many star performers in the gold arena include SPDR (GLD), Barrick Gold, AngloGold Ashanti Ltd, and Newmont Corporation.

The Final Word

There is near universal consensus that gold is a safe investment during global uncertainty, and a powerful hedge against inflation. However, there are other factors that are driving up the gold price, notably rising tensions between the US and China. This uncertainty in the economic and political arena is fueling a resurgent gold price. It is true that physical demand for gold bullion is near zero, but the demand for gold stocks as a hedge against the turmoil is rampant.

It is gold’s safe-haven appeal that continues to reel in gold traders by the truckload, particularly at a time when stocks are volatile, with no traction to these types of investments. Coupled with weak US data, notably rising unemployment numbers, coupled with massive stimulus, gold is benefiting. In a roundabout sort of way, the physical shutdown has actually worked in gold's favor, since less gold is being mined, increasing its scarcity in the global markets.

If the recovery proves to be a lengthy process, gold will continue to rally. If a vaccine is found and administered globally, gold will lose its immunity and prices will fall.

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Nevada accounts for 75% of U.S. gold production.

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