Gold Prices Are Soaring! Why?

The precious metal, gold, has breached a major milestone and passed the critical $2,000 mark. This move is mainly caused by the Fed’s loose monetary policy due to coronavirus and the ongoing geopolitical tensions between the US and China. The biggest question for investors is where do we go from here?

GETTY IMAGES/ISTOCKPHOTO

Gold prices have been rallying since the last quarter of 2018. Since then, it has been recording gains for each quarter. The chart below shows that gold price has the longest quarterly run since the 2007 financial crisis.

Gold may continue its momentous run for another few quarters, especially this quarter. The percentage gain for this quarter is very much dependent on the Covid-19 situation. There is no realistic expectation that a vaccine will be available before 2021. That means local shutdowns on a global basis are going to limit economic recovery. As western nations move into autumn, the flu season is only likely to worsen the already complex situation. This means that there are higher chances of strong percentage gains for the gold price in Q3 and Q4.

There is also a reasonable positive co-relation between stocks and gold prices. Historically, gold is a risk-off asset, and investors only put money into this asset when they do not believe in the stock market rally.

Nonetheless, the critical point to pay attention to is that the US stock market is moving higher because of monetary policy support. The reason that we see the momentum in the gold price is again for two causes. Firstly, investors do know that the Fed is going to keep their dovish monetary policy for an extended period of time. That means weakness for the dollar. A weak dollar is good for gold price. Then, there are many investors who have not deployed their full capital in the equity markets, and are hedging their risk by using gold. 

What do you think?

References:

1. Gold Prices Are Soaring To The Moon. Here’s Why, Naeem Aslam, July 1, 2020 (www.forbes.com)

2. Gold Soars To Record High, Stocks Stay Uncertain, Focus Malaysia (by Reuters)

3. What Is The Gold Price Today? https://www.express.co.uk