Despite being heavily hit in March, perhaps due to being a victim of the so-called 'dash for cash', gold, supported by a long list of factors, namely increase in geopolitical tensions, real rates tumbling, the dollar weakening, and government and central banks unleashing vast stimulus measures to try boost economies, has on a year-to-date basis registered substantial gains.
After surpassing levels previously witnessed in 2011, amid the resurgence in COVID-19 cases in some parts of the world – heightening concerns about a second wave, the precious metal has now reached an all-time high, placing it ahead of the majority of stocks, bonds, and commodity instruments. Notably, gold traded at a fresh record high of $1,980 per troy oz. on Wednesday, supported by the US-China economic conflict, which seems to be far from easing and dimming hopes of an economic recovery as the virus showed no signs of abating. Gold has marched relentlessly higher in recent sessions as doubts have grown over the global recovery from COVID-19.
The pandemic continued to rip through the US, while flaring-up in Europe. Albeit aware of the ensuing repercussions, already witnessed in the first wave of COVID-19 pandemic, the recent rapid increase of COVID-19 cases have once again, left governments no option, but to half-heartedly renew their efforts, to mitigate the contagion through closures, putting further doubts on economic recovery. The unprecedented COVID-19 pandemic has pushed the world economy into one of the sharpest downturns on record.
The International Monetary Fund predicts that this year, consequent to the governments' necessary responses to save lives, the world economy will shrink by nearly five per cent, prompting central bankers to act accordingly, to at least, cushion the ensuing impact, by pumping hundreds of billions of dollars into financial markets, to prop up failing economies, and thus alleviate economic figures.
Consequent to the substantial fiscal and monetary stimulus measures employed to mitigate the economic blow caused by the pandemic, yields on what are considered to be 'safe' sovereign bonds declined. Similarly, real yields, which strip out inflationary expectations from the nominal yield on bonds, plunged, some of which started paying investors a negative return – increasing the demand for Gold, which, offers no income.
Further fuelling a frenzy for the precious metal is the recent downward movement in the US dollar – typically, a benchmark pricing mechanism. Undoubtedly, the current macro-economic environment, fenced by the impact of the COVID-19 pandemic, along with the U.S. government's record level of debt accumulation may well impact the U.S. dollar's status as the world's reserve currency.
As things stand, we believe that this current economic environment composed of; the Federal Reserve’s highly accommodative stance, negative real yields in the US Treasury market, and a sinking US dollar may indeed lead to further upside for the yellow precious metal.
Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information visit, https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.