Investors in precious metals have probably noticed a trend emerging over the past few months that has seen gold soaring to record highs. What is the cause for this and more importantly will it continue?
2020 has been anything but ordinary for markets. With an abundance of gloom and bad news wrought by the outbreak of Covid-19, demand for gold has flourished, catapulting the yellow metal higher due to several trends.
What to make of gold’s rise
Gold recently topped out at an all-time high last week, crossing over $2,000 for the first time. The price was driven in large part by an erosion of the US dollar and seemed to easily overtake a previous high of $1931 set back in August, 2011.
To better understand the recent strength behind gold however we must dig a little deeper. One does not have to look very far to uncover some warning signs of a recession.
For example, the recent economic data in the United States saw the largest drop on record of GDP in a quarter. Beyond the US, the International Monetary Fund (IMF) is projecting a 5% annualized decline in the world economy.
Consequently, central banks globally have opted to juice up financial markets by injecting billions to help stabilize economies throughout the developed world. In Europe and the United States this has resulted in new currency being printed.
The repercussion of increase in money supply leads to lower interest rates, while also increasing the amount of currency in circulation. As such, these currencies tend to weaken due to inflation, which is what is happening with the USD and other majors.
With normal safe haven currencies in question, this also creates another layer of demand with gold, as it is seen as the principle option for doom and gloom investing. With the virus not even close to abating, it is likely this trend will continue in the second half of 2020.
The price of silver has also spiked in recent weeks, or 25% in July, netting an even larger increase than gold. Still, the price of the white metal is not even close to its all-time highs and is seen as undervalued.
With gold markets supercharged at the moment, silver could be an obvious beneficiary as investors look to put money into precious metals. The ratio between gold and silver is also suggesting silver is very cheap at the moment, which could see further grounds for growth.
Looking ahead, precious metals should be able to retain their luster with good news in short supply across the globe.
With many countries openly contemplating re-entering lockdowns in some capacity, any hope for a quick economic recovery seems wildly optimistic. In such a scenario, precious metals will continue to be in demand.
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