Introduction –
Gold has been considered a highly valuable commodity for a long time and is widely followed in financial markets around the world. Its most commonly quoted in US dollars and tends to increase as stocks and bonds decline. The metal holds its value well, making it a reliable safe haven. Investors have gold in their portfolios for the following reasons –
- It’s a hedge against inflation – Usually when inflation rates tend to be high, over the longer term, gold becomes a hedge against inflationary conditions. The value of currency goes down as inflation rates are on the rise.
- Geopolitical uncertainty – Gold generally tends to hold onto it value during times of economic uncertainty. Whenever there is a crisis in the world, investors flock to gold as it’s a primary safe haven and performs better than other assets.
- Portfolio diversification – It’s always useful to invest in assets that are not closely correlated to one another. Historically gold has always been negatively correlated to stocks and other financial instruments.
Gold market overview –
The gold market enjoyed a very turbulent 2020. The price of gold crashed hard during the peak of COVID-19 selloff but spiked sharply back and hit all-time highs in early August. Despite a downward correction from those record levels, the precious metal is still up more than 20% year-to-date.
Q1 – Markets were extremely volatile due to increasing coronavirus fears, threatening global recession and drastic economic downturn. In times like this, gold is usually seen to be a safe investment. However, markets saw investors abandoning the safe-haven asset for covering losses or for concerns over physical demand.
The US Federal Reserve slashed interest rates as an emergency intervention to protect the economy from adverse effects of the virus outbreak. Usually, lower interest rates mean a weakened US dollar, pushing gold prices up as a consequence. The price of gold went up briefly, but this did not last too long.
The pandemic wiped out trillions of dollars from all major asset classes, including gold, as investors liquidated their portfolios to raise cash which was seen as the safest investment at that moment.
Q2 – The gold market rallied in the months of April and May to almost an eight-year high (spot price climbed to $1,798/oz in April), but the markets saw a sharp drop in June where the price fell by almost 4% in the first week.
The precious metals were stretched in opposite directions as uncertain fiscal stimulus and government support were favouring gold, but on the other end, equity market rally pushed down the need for a safe haven. Gold has outperformed most major assets, as when the gold market retreated, investors were quick to buy the dips and push prices up again.
Also, negative real interest rates coupled with falling bond yields, have kept the gold market elevated. Not to forget, rising geopolitical tensions between the US and China over trade and the spread of the virus have furthered gold’s cause.
Q3 – Gold prices reached an all-time high of $2,096/oz early August, rising by 35% from the start of the year and 40% since March lows. But the yellow metal soon lost some steam when the US dollar strengthened as the US government failed to agree on a fresh round of economic stimulus.
Fiscal policy and stimulus were some of the factors that pushed gold to new heights. In addition to the quantitative easing and low interest rates, the pandemic was a major catalyst for the momentum. More debt had been created in the last four to six months than the entire crisis in 2008, showing the real weakness of the global economy.
Despite trending higher for the majority of July and August, volatility set in for gold in September, preventing the metal from retaining any gains pushing it below $1,900. A surging US greenback recorded its best performance during the last week of September, dropping prices further.
The pending US election, along with the second wave of COVID-19, is expected to add tailwinds for gold in the short term. Also, disagreements about passing the multi-trillion-dollar stimulus packages added to the volatility.
Q4 – Gold attempted to soar past the $1,950 level in November, but ultimately drifted towards a multi-month low as there was a correction in the market. In the final two weeks of November, gold lost around $150/oz, or roughly 7.5% of its entire value.
By the end of November, gold was at around the same level it was in June as all of the commodity’s gains since then had vanished. Ending of the controversy surrounding the US Presidential elections, positive development of the COVID-19 vaccine and rallying equity markets all contributed to gold’s decline.
Gold prices have incrementally been creeping up in December as a new COVID-19 variant, which is more contagious than its predecessor, had been discovered in the UK and Africa. This has resulted in a sharp spike in daily infection rates and death tolls, bringing back economic restrictions and stricter lockdown as a consequence.
Conclusion –
Coronavirus was the central theme of 2020. It incapacitated the entire globe, pushing nations deeper into recession and economic contraction. It induced volatility that markets had never seen before, leaving investors baffled and unsure of their next move. However, with a speedy rollout of vaccines and mass inoculations, there may still be light at the end of the tunnel.
This will reduce market volatility and provide much needed stability to various asset classes. And if stocks continue rallying and gold prices keep falling, we may not be needing a safe haven after all.
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