The explosive rally in gold prices has been driven by the coronavirus pandemic. But the party should continue long after this crisis is over.
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.
Here are three reasons why the yellow metal is soaring in 2020 – and why the party isn’t over yet.
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.
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.
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.
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.
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.
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.
Last modified: September 23, 2020 1:55 PM