Giles Coghlan, chief currency analyst at HYCM, analyses the surge in gold prices and how the COVID-19 pandemic may continue to influence its fortunes.
In the future, investors and traders will regularly look to 2020 to understand just how different stocks, bonds, currencies, commodities and investment securities react in times of prolonged market volatility. What makes this year stand out from other volatile periods (the 2008 global recession immediately comes to mind) is twofold.
The first has to do with the COVID-19 pandemic being a health crisis shrouded in uncertainty. We simply do not know when or how the virus will cease to dominate government agendas, business activities and consumer behaviours. As a result, traders and investors cannot predict with any certainty what the coming months, weeks, or even days will bring. This makes managing an investment portfolio particularly difficult, forcing investors to contend with something beyond their control.
The second has to do with the long-term implications of COVID-19 on the global economy. There are concerns that the coronavirus will trigger a reverse in globalisation; for example, new popularity for protectionist policies to safeguard the future of national industries and a contraction in global supply chains. It is too early to tell whether this is likely to be the case, but either way, we must acknowledge the enduring influence COVID-19 will have on businesses, government and investor actions for many years to come.
A critical crossroads
At the moment, we have reached what I consider to be a critical juncture. We have weathered the initial outbreak of cases, and countries are now relaxing social distancing measures as a result. In reaction to this, the financial markets have been posting positive figures. On 20 July, the Euro hit its highest level against the US dollar since March – a consequence of EU leaders negotiating a €750 billion recovery plan. In response to this plan, the Dow Jones Industrial Average rose 1.03% and the S&P 500 regained positive territory for the first time since 8 June.
While this is welcoming news, such market movements only reveal part of a bigger story. The stock markets may be making gains, but so has the price of gold. What makes this particularly interesting is the fact that investors tend to rally to this so-called safe-haven asset in times of uncertainty. Gold prices are currently trading at over $1,800 per ounce – a major milestone that has not occurred since 2011. What’s more, the gold price has gone up by around 19% in 2020 alone, and commentators are hopeful that gold will surpass $2,000 per ounce by the end of the year – a record breaking achievement.
Such projections have left many investors scratching their heads. Have we really entered a period of market recovery or are we witnessing the calm before the storm – a second outbreak of cases or significant economic downturn that will send shockwaves across the major indices?
The gold rush is here
Put simply, gold prices are ideally positioned to increase over the coming months. This is not due to an increase in consumer demand for the precious metal, but rather a reflection of investors using gold to hedge against market uncertainty by improving their risk-adjusted returns and also having access to a liquid asset able to hold its value in times of volatility.
It seems reasonable to assume gold will surpass its all-time high of $1,920 recorded in September 2011 in the coming months. This will be a defining movement, and could spur on the buyer demand needed to break the $2,000 per ounce barrier by the end of the year. Of course, such growth will by no means be a straight-line trajectory.
The reality is that the price of gold, like all assets, will be influenced by geopolitical events and the COVID-19 pandemic. However, signs at the moment seem to suggest that underlying market uncertainty is encouraging investors to flock to safe haven assets, with gold featuring at the top of their lists.
The reality is that the price of gold, like all assets, will be influenced by geopolitical events and the COVID-19 pandemic.
When is the right time to buy gold?
For those looking to buy gold, a useful reference tool is the Volatility Index, or VIX. By analysing future risk and investor behaviour, the VIX provides a 30-day projection of the expected volatility likely to be experienced by the major markets – a vital instrument in today’s climate.
Based on performances in the past, a drop in the VIX should be followed by a rise in gold prices. Conversely, a rise in the VIX will normally occur prior to gold prices dropping. That’s why investors looking to buy gold need to watch the performance of the VIX carefully to ensure they enter the market at the right moment.
Overall, investors should not rush to gold simply because it is rising in price. Any trade or investment decision needs to be influenced by a bigger strategy and lead to an ultimate goal. A common mistake is investors acting hastily and making rash decisions, instead of taking a step back and thinking how they can best take advantage of the market while at the same time not losing sight of their ultimate financial objectives. By understanding this simple point, investors and traders will be best positioned to make effective use of future gold price movements.
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