3 Reasons Gold Prices Are Exploding – And Why the Party Isn’t Over Yet

May 8, 2020 3:55 PM UTC
The explosive rally in gold prices has been driven by the coronavirus pandemic. But the party should continue long after this crisis is over.
  • The explosive rally in gold should continue. It could go over $2,000 soon.
  • Economic uncertainty supports gold prices because investors view the yellow metal as a safe haven.
  • Massive stimulus measures and a potential U.S.-China trade war are also pushing gold prices higher.

Since careening below $1,500 an ounce on March 19, the price of gold has been rising steadily. It’s already surged past $1,700, and some analysts believe it could set a new record above $2,000 within the imminent future.

Since hitting bottom on March 19, gold is soaring. | Source: Yahoo Finance

Here are three reasons why the yellow metal is soaring in 2020 – and why the party isn’t over yet.

1. Gold Is (Still) a Safe-Haven Asset Against Global Uncertainty

Many investors view gold as a safe haven during crises like the coronavirus. Fear of a global economic downturn is driving investors towards the safety of the yellow metal. It seems less risky to buy gold during times of uncertainty than volatile investments like stocks.

Adam Koos, president of Libertas Wealth Management Group, said:

If the aftershock of the COVID-19 virus is a much deeper, wider iceberg under the surface of the economy, then I think we could see an acceleration in buying pressure on gold.

Governments around the world have started to ease lockdowns, but the economy likely won’t go back to normal for a long time.

People may be afraid to go back to crowded public places, and no one knows for sure what the post-pandemic world will look like.

2. Fed’s Stimulus Measures Fuel the Yellow Metal

The U.S. Federal Reserve’s massive stimulus to support the economy is another factor that promises to drive gold prices higher. When central banks print more money in an attempt to stimulate the economy, it can increase inflation.

Gold is a good hedge against inflation because the rising cost of goods and services tends to erode the value of the dollar, while the yellow metal tends to hold its value in real terms over a long period of time.

Tai Wong, head of base and precious metals derivatives trading at BMO, said:

Gold’s rallying because this monetary largesse will eventually have to be repaid and that payment may come as sudden higher inflation somewhere down the road.

Disastrous economic data will likely lead to other rounds of stimulus measures, which could cause gold to rally even further. High unemployment numbers boosted the yellow metal on Thursday.

Gold prices and interest rates tend to be inversely correlated because low interest rates generally accelerate inflation.

The Fed essentially cut rates to zero in March. Some traders even bet we’ll see interest rates go negative next year.

3. Fears of a U.S.-China Trade War Make Gold a Solid Long-Term Hedge

Global political tensions should provide long-term support for gold prices even after the coronavirus crisis is over. Especially since President Donald Trump has revived U.S.-China trade war fears by threatening to impose new tariffs on China.

As Trump and Beijing play the COVID-19 blame game, a trade war is becoming a growing possibility. And the resumption of tensions between the U.S. and China could extend the duration of the global recession.

Naeem Aslam, chief market analyst at Avatrade, said ongoing tensions between the U.S. and China could increase the demand for the yellow metal:

Fear of trade war usually pushes investors towards safety bets and gold sits at the top of this ladder. No one wants to see a hostile situation surging but the U.S. officials are on course to play with fire.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author does not hold any investment positions in gold.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

@SBChateauneuf

Stephanie has been writing about stocks and financial markets for several years. Based in Canada, she has written for The Motley Fool and Seeking Alpha. She received an MBA in finance and worked for National Bank of Canada. Check out more of her experience on LinkedIn + and follow her on Twitter. Reach her at stephanie.chateauneuf (at) gmail.com or visit her profile on Muck Rack here. Stephanie is a Trusted Journalist.