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As Hypervolatility Rages, the Gold Price Is Surging for One Simple Reason

Last Updated September 23, 2020 1:46 PM
Sam Bourgi
Last Updated September 23, 2020 1:46 PM
  • June gold futures peaked at $1,677.20/oz., fully offsetting losses incurred over a ten-day slump earlier this month.
  • Bullion is one of the only positive-returning assets of 2020, partly because options for wealth preservation are extremely limited right now.
  • U.S. economic numbers are about to get even grimmer as millions are laid off work amid the coronavirus pandemic.

The price of gold continued to climb on Thursday, even as risk appetite returned to global markets in the wake of a landmark stimulus bill designed to restart the American economy.

As Frank Templeton analyst Steve Land recently noted, gold is doing its job  in an age of uncertainty and hypervolatility. But the reason for gold’s resurgence could be simpler than that: There’s no other option for wealth preservation.

Gold Extends Rally

Comex gold for June settlement reached an intraday high of $1,677.20 a troy ounce on the New York Mercantile Exchange. That represented a gain of $42.90, or 2.6%.

By late afternoon, the yellow metal had pared its gains down to $19.30, or 1.2%, to settle at $1,653.60 an ounce.

June gold futures
Gold has rallied in five of the last six trading sessions. | Chart: barchart.com 

A stronger gold price failed to rub off on silver, which snapped a five-day winning streak Thursday. Silver for May delivery  declined 21 cents, or 1.4%, to $14.66 a troy ounce.

The Real Reasons Gold Is Surging

Gold wasn’t immune to the turmoil that engulfed financial markets earlier this month, though its losses were likely due to a combination of short-covering and concerns about industrial metal demand amid coronavirus.

After being clobbered in mid-March, gold has fully recovered and appears poised to knock-out new highs above $1,700. Bullion is benefiting from a negative real-interest-rate environment  as inflation continues to outpace interest rates.

So while economics, monetary policy and global pandemic are strengthening gold’s haven appeal, real interest rates are the primary catalyst for the bull market.

Adding to that, “where else is there a safe-haven play?” asked Sean Lusk in an interview with Kitco.com . Bond yields have been in free-fall for the past two years, with a portion of the U.S. Treasury curve turning negative for the first time.

With government bonds appearing less attractive to investors, not least because of the massive surge in public deficits and dismal economic growth, bullion is become a more attractive macro hedge.

Even Federal Reserve Chairman Jerome Powell admits the U.S. economy may be in recession already:

The economic outlook has deteriorated significantly since coronavirus started sweeping the globe more than a month ago. With the U.S. economy in virtual shutdown mode, weekly jobless claims have surged to a record 3.28 million. That number could get even uglier as the full effect of the coronavirus shutdown becomes known.