Shark Radar

Broader review of the most significant events worldwide
Aug 4, 2020, 6:48 PM GMT
#Economics

Gold's Golden Days Are Here to Stay

This is one for the books – the price of gold just reached $2000 per troy ounce for the first time ever. This happens as the remarkable, bullish rally of the precious commodity continues to advance on surging coronavirus cases globally coupled with the increasingly more cautionary outlooks of economists worldwide concerning the bolstered likelihood for a protracted and uneven recovery.

More and more experts now expect to see a second pandemic wave to hit the world over the following weeks and months, which could very likely lead to the reintroduction of containment measures and lockdown policies around the world, similarly to the situation at the beginning of the crisis. This is already starting to happen in some countries such as Australia, where the state of Victoria, which incorporates the city of Melbourne, the second-largest city in the country, reintroduced stringent restrictive policies after a significant spike of new cases was recently reported.

As a direct implication of these drastic measures, which are needed to curtail the disease's rate of spread internationally, many economists fear that the fragile economic rebound from the last several months could be jeopardised if the global economic activity is allowed to diminish once again. All underlying factors seem poised to invalidate the likelihood of a snap V-shaped recovery, and instead, the opinions of most experts seem to converge towards projecting a protracted W-shaped recovery. Such assertions are substantiated by the expectations of a second pandemic wave.

Thus, the bullish run of gold, which remains a well-known safe haven, has been supported by a consistent rise of demand for low-risk securities. The uncertainty stemming from the coronavirus crisis has rattled other financial instruments that had previously enjoyed the status of safe havens, such as the US dollar.

The value of the almighty greenback has been waning over the past several weeks, as traders and investors started to realise that not even the convertibility of the dollar could be used to weather the ripples of the crisis. Instead, the mantle of the most desired currency has been passed onto the Euro, which is surviving and thriving under the current circumstances.

But while the currency markets are undergoing through such transformational changes, gold's unprecedented hike seems unfazed by this volatile uncertainty. Rather, it is fuelled by it, in addition to other contributing factors, which is why the price of the precious metal is likely to continue blinking around and above $2000 for the foreseeable future.

It is precisely the stability of gold's price that garners so much attention recently, seeing as how it is the only major asset whose price action did not register the same tumultuous fluctuations as other assets did during the progression of the crisis.

As can be seen on the comparison chart below, the yields of multiple US Government treasuries plummeted during the height of the crisis. Such occurrences are understandable during such turbulent times when most investors scramble for the securities that entail the least amounts of associated risk.

While the yields of the 10-year and 30-year bonds were sinking to historical lows in conjunction with a comparable turmoil that ravaged other precious metals such as silver and platinum, the price of gold remained relatively unscathed by the sweeping crash during the period between the 24th of February and the 25th of March, despite a minor correction.

The initial fallout was then followed by a tentative recovery process, which saw bond yields moderately recuperating in addition to a discernible stabilisation of commodity prices. However, from early June onwards, fear and panic started creeping into the global capital markets once again. While bond yields expectedly started depreciating yet still, platinum and silver made an exception and contrarily to the initial hit, the prices of these commodities bandwagoned on gold's rally and continued their own uninterrupted hikes.

All of these developments are signalling the new role of gold, and the commodity market as a whole, in the context of the continually evolving coronavirus crisis. While the high demand for low-risk government securities is prompted mostly by sheer investors' panic that continues to plague the tentative recovery process, the heightened demand for metals cannot be attributed solely to the protection-seeking tendencies of investors.

Investors are starting to see the long-term benefits of gold not only as a hedging instrument against uncertainty and risk but also as a tool for wealth accumulation. Prior to the outbreak of the crisis, investors strived to build their portfolios with a diversified basket of various assets, all of which were intended to balance the sustained market ripples and generate yield. However, the coronavirus crisis has exposed the weakness of this approach, as even a well-balanced basket of stocks and bonds can no longer guarantee such a steady yield.

As the chart illustrated, at times when the underlying uncertainty is exacerbated the most, that is when most assets started crashing, all except gold. That is how investors started recognising the intrinsic value of the relatively homogenous gold, which is weathering the fallout from the pandemic quite well and even manages to entail considerable returns. With no definitive resolution to the crisis in sight, the continuation of gold's rally seems unstoppable.