Investors are flocking to gold amid Covid-19

Investors are flocking to gold amid Covid-19
REUTERS/Leonhard Foeger

The 2020 gold rush is well and truly here.

On August 4, the spot price of gold topped $2,000 (£1,521) an ounce. This means the price of gold has risen by 32 per cent since the beginning of the year – an impressive feat for any asset.

For those of us who have been closely observing the price movements of this precious metal, the news of gold reaching a record high was hardly surprising.

After all, basic financial orthodoxy tells us that in times of volatility and heightened uncertainty, investors rally to safe-haven assets that hold their value due to consistent market demand.

Since March, the coronavirus pandemic has sparked a surge of interest in gold.

Key Points

  • The price of gold has topped $2,000 an ounce
  • It is being used as a hedge against stock market downturns
  • Investors could use the volatility index to establish when to buy gold

From established wealth managers through to retail investors, it is being used to hedge against currency fluctuations, stock market downturns and inflation.

From mid-March onwards, the price of gold has been steadily rising. However, commentators assumed that this rally would eventually subside once the pandemic had been effectively contained and lockdown measures were eased.

Interestingly, this has not been the case.

Yes, the rate of coronavirus infections has dropped significantly, and lockdown measures are being relaxed in an attempt to create a post-pandemic economic recovery.

Yet despite all of this, investors are still looking to gold. We can draw plenty of conclusions from these simple observations.

However, what really stands out is the fact that the world’s major indices have also been recording modest gains.

It seems as though we have reached a critical crossroads; one path leads to a post-pandemic economic recovery spurred on by consumer spending, investment into equities, and renewed investor activity. The other is a more complex path where a second spike in Covid-19 cases and significant economic downturns as a result of the pandemic are distinct possibilities. All will be revealed over the coming months.

However, with Goldman Sachs and the Bank of America posting very bullish gold price forecasts, it seems the markets are preparing for the latter path.

Buy, sell or hold?

Naturally, investors and traders are confronted with the following question – should I buy, sell or hold?

It might seem like a simple question, but anyone who knows the financial markets appreciates that there is no certainty when it comes to anticipating an asset’s future price movements.

For this reason, we need to consider the advantages and disadvantages of buying gold in current conditions.

The bullish case for gold is relatively straightforward. Interest rates are low, and we are not likely to see a hike for at least two years.

On top of this, with central banks adopting quantitative easing measures, we are likely to see a significant devaluation of the world’s major currencies.

Finally, alongside the economic uncertainty spurred by Covid-19, we should not forget this year’s other major geopolitical events.