InvestmentsAug 12 2020

Investors are flocking to gold amid Covid-19

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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.

These include the US presidential election in November, the ongoing US-China trade war, and the UK’s departure from the European single market, with or without a deal.

The outcomes of each of these events will have a profound impact on the financial markets, which is why gold could surpass $2,000 an ounce by the close of the year.

These are convincing reasons that highlight why investors are buying more gold and holding onto this asset. However, some of these points can be countered by the bearish case for gold.

In short, those who are sceptical of gold’s future performance are also those who are confident that the global market will be able to quickly rebound and recuperate the initial losses incurred by the pandemic.

While this is wishful thinking, we should not dismiss this optimistic outlook based on what we are observing at the moment. 

Knowing when to buy gold is difficult. That is why I always recommend that those interested use the volatility index, or Vix.

For those who are unfamiliar with this tool, it is a real-time market index that presents a 30-day forward looking volatility forecast; it does this by measuring market risk and potential investor sentiment.

When the Vix rises, we generally see a drop in the gold price. Conversely, if the Vix drops in price, we should see the price of gold rise.

Believing the hype

Some investors have a tendency to jump on the bandwagon. In other words, they believe the hype and act without doing the proper research.

It is difficult not to be bullish on gold’s future; however, any decision to buy or sell must be taken after appropriate consideration. Let us not forget there are other safe-haven assets that are posting impressive gains to little fanfare.

Silver comes to mind – since the beginning of May its price has risen by nearly 80 per cent.

There is no doubt in my mind that 2020 will be a historic year for gold. 

For this reason, all investors need to keep an eye on its performance as it could indicate when we are seeing the beginning of a post-pandemic market recovery.

Giles Coghlan is chief currency analyst at HYCM