Gold prices are behaving so favorably mainly because a wave of fears surged over a second wave of the coronavirus outbreak, which has increased the demand for safe-haven assets like gold.
Gold prices are behaving so favorably mainly because a wave of fears surged over a second wave of the coronavirus outbreak, which has increased the demand for safe-haven assets like gold. The markets have also learned about the economic data of the major economies, which ended up being very weak and increased concerns for a grim outlook, and about the increasing tensions between China and the United States, which now seem headed towards another trade war.
Many countries around the world are now attempting to reopen their economies after being locked down for weeks or months in an effort to prevent the spread of the novel coronavirus. Nevertheless, last week countries like China, South Korea, and the United States reported a rise in the number of new infections. Those facts spread the fear for a second wave of the pandemic, which at the moment has infected around 4,722,233 individuals worldwide and has killed 313,266 people.
This bleak outlook increases the chance for further monetary policy easing, as well as extra fiscal stimulus. The former implies lower cash rates, and some even foresee negative interest rates in countries like the United States, which would put a downwards pressure on the main fiat currencies and would, in turn, favor precious metals. The latter implies higher public spending, which could lead to a global debt crisis which wouldn't only affect the emerging markets but also the developed world.
Investors are is also in suspense because of recent developments regarding the trade conflict between the United States and China. Likewise, China is finding itself in a difficult relationship with Australia, which has long been thought one of its best trading partners, due to its close geographic proximity. Specifically, the Australian government recently claimed that China is ignoring its calls to discuss the easing of the tensions that recently escalated because of Australia's choice to call for an independent investigation about the origins of the pandemic.
"We are open to having that discussion, even where there are difficult issues to be discussed,” said Australian Trade Minister Simon Birmingham after claiming that its request to discuss the issue has been denied by the Chinese.
The relative weakness of the dollar last week was yet another reason why gold was favored last week, as we already know that the price of gold is fairly dependent on the value of the dollar. Nevertheless, the greenback's weakness was short-lived, especially after Federal Reserve Chairman Jerome Powell confirmed that the central bank is not considering bringing the cash rates below zero.
"I know there are fans of that policy, but at the moment, this is not something we think about", explained Powell, "We think we have a good toolkit and this is what we will use," he added, warning against an uncertain economic outlook and calling for additional fiscal support.
In any case, also favored by the increasing preference for "safe-havens", the US dollar index, which measures the performance of the greenback against its main competitors, managed to advance 0.67 percent last week.
Some analysts are now recommending investing in gold to strengthen their portfolios. This makes sense given the late poor performance of the main benchmark indexes and the increasing lack of trust towards fiat currencies.
"The advantages of gold are that it is universally recognized as a store of value, can act as a liquidity hedge, and can also accrue value in the right market conditions," explained an analyst at Forbes.
If the market sentiment continues behaving in the same way, we could foresee more volatility in the future, so protecting the portfolio with assets like gold sounds like an attractive idea.