Gold Prices Reacted As Expected To COVID-19 Pandemic And Vaccine Update

November 18, 2020

Investors need to remain agile in how they invest their money as markets have shown a tendency to move sharply in one direction. The most recent example of a sudden movement was Nov. 10’s global stock market surge in reaction to an encouraging COVID-19 vaccine update from Pfizer.

But at the same time stocks soared higher, gold prices tumbled because the likelihood of a successful vaccine implies a return to some form of normalcy as the worst pandemic in a generation comes to an end.

While it is nearly impossible to forecast when the pandemic will no longer be a concern, investors should have a game plan in place for multiple scenarios. There are plenty of solutions for large amounts of money that would need to be transferred as needed.

Gold And COVID: An Ideal Match Until It Isn’t

It is no secret that gold holds up well during a period of crisis as the commodity in its many forms (physical, paper form, bullion, stocks, ETFs, etc.) is a hedge against uncertainty. It wasn’t until early March that the world was presented with irrefutable signs the COVID-19 pandemic will pose a major health, social, and economic problem all across the world.

The XAU/USD (price of one troy ounce of gold in US dollars) showed nearly consistent gains since the onset of the pandemic. By mid-July, gold traded above its all-time peak of $1,920.30 an ounce which it hit in September 2011.

Experts noted that gold’s popularity was surging at exponential rates because it provides protection not only against inflation but global concerns about the economy and the pandemic.

But when Pfizer and its partner BioNTech announced on Nov. 9 its vaccine against the novel coronavirus was 90% effective in studies, gold immediately suffered its sharpest daily drop in more than seven years.

Specifically, December gold futures contracts fell around 5% to settle at $1,854.40. Perhaps ironically, the major selloff immediately followed gold’s largest weekly gain in three months.

What’s next for gold remains unclear despite the second wave of infections sweeping across the world. If additional favorable news releases related to the vaccine are released before the end of 2020, investors may be more willing to overlook a few more months of uncertainty ahead of the global march to vaccinate hundreds of millions of people.

It was never a secret that a potential medical solution to the pandemic represents a bearish scenario for gold because it will usher in consumer confidence and a potentially soaring economy.

Inflation Targets And Concerns

The U.S. The Federal Reserve announced in mid-September it will “aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well-anchored at 2 percent.”

The problem facing the American central bank is that even during the best of times, inflation couldn’t rise above 2 percent. The U.S. economy was chugging along at multi-decade low levels of unemployment before the pandemic at 3.5%. As such, expectations for any meaningful approach towards the 2 percent goal is out of reach.

Among the 17 officials on the Federal Open Market Committee, not one expects inflation to hit the two-handle through at least 2023.

Meanwhile, inflation across the 19-nation eurozone dipped to negative territory in August for the first time since 2016. Analysts and experts were modeling a reading of positive 0.2 percent but inflation came in at negative 0.2 percent. Canada recorded two consecutive months of negative inflation in April and May before rebounding to positive territory in June.

Now at first glance lower prices seem like a positive for individuals as they are paying less money for items than previously expected. But that is part of the problem as consumers may wrongfully assume that declining prices will fall even further so consumer spending is ground to a temporary halt.

If tens of millions of people across a nation stop purchasing goods and services because they expect to score a better deal later on, the economy can experience a painful pause. This is why central banks go through various measures to ensure prices move higher in a stable and reasonable manner.

Gold Versus Bitcoin: Gold Wins This Round

Many people view bitcoin as a modern-day competitor to gold that could one day replace the commodity. But the COVID-19 pandemic may have solidified gold as a safer and easier store of value compared to bitcoin.

For starters, gold exists in many forms, including physical bars and through exchange traded funds (ETFs) that trade on a stock exchange like a regular stock. By contrast, anyone who wanted to get exposure to bitcoin has to deal with new concepts like hot wallets and cold storage.

Besides the complexities of bitcoin, the price movement during the pandemic is inconsistent with its purpose of safe haven. The digital coin is known to show extreme volatility, including a massive one-day loss of nearly 30% in 2020. By contrast, the 3 percent drop in gold prices seen on Sept. 5 2020 was its worst daily performance in six years.

Bottom Line: Gold Serves A Purpose

Regardless of how investors diversify their portfolio, the COVID-19 pandemic has made it clear gold serves a purpose. Billionaire investor Warren Buffett famously said that gold is an asset class that offers a tool for investors that want to go “long on fear.”

He added that gold makes investors money when they become afraid but the physical commodity itself doesn’t produce anything new.

At a time when legitimate fear struck markets worldwide, gold performed as it should have. Savvy investors who sold some of their stocks in favor of gold most likely minimized downside risk from stocks impacted by the pandemic.

Now that there is a legitimate reason to believe the pandemic is coming to an eventual end thanks to a vaccine and other forms of treatment, gold’s proposition value is fading. The commodity should fall in value -- that is until the next global crisis presents itself and investors flock back to the commodity.


Jeff Broth is a business writer, mentor, and personal finance advisor. He has been consulting for SMB owners and entrepreneurs for the past seven years.

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.
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