Gold has become one of the star investments in this difficult year of 2020. After staging a spectacular climb during the summer, culminating in the all-time high at the end of July, the price has lost some steam, remaining in a narrow fork between $1,850 and $1,900 an ounce. Despite this, the interest of investors in the metal as a refuge asset and the geopolitical events that are coming make it advisable to continue trusting gold. In this post we will explain why.
One of the factors that have contributed to this performance of gold during 2020 has been the increase in demand from the investment sector , which has served to partially offset the drop in demand from the jewelry sector, the largest consumer of the precious metal.
As stated in the Gold Demand Trends report for the third quarter of the year, published by the World Gold Council , investment in gold bars and coins increased by 49%, to 222.1 tons , between July and September , compared to the same period of 2019.
This increase has occurred in almost all countries, progressively as the economies of the confinement emerged and the supply problems caused by the bottlenecks derived from the closure of communications were solved.
In addition, the increase in the price of the metal has also caused the value of this demand for gold bars and coins to skyrocket, reaching 34.9 billion dollars in the third quarter.
The fact that international investors are strongly supporting gold is significant and suggests that the upward trend in its price has not ended, so it still makes sense to trust the precious metal as a refuge asset, in a particularly difficult year for the rest of the assets.
According to David Kuo , CEO of Smart Investor , the main reason to continue betting on gold is that it continues to be the best among the main investment assets so far this year.
Gold vs. Actions
Since the beginning of the year, the metal has appreciated 24% , clearly outperforming the main world stock indices, such as the Straits Times Index , which brings together the 30 main companies on the Singapore Stock Exchange and which has dropped 21% this year. year, or the Dow Jones Industrial in the United States, which has lost just over 7%.
Gold has also far exceeded the revaluation of the MSCI World Index (+4%), which brings together the quotes of companies from 23 markets and has only yielded compared to the Nasdaq (+32%), although at many times in July and August past also exceeded this percentage.
Even so, gold is a long-term asset, which shows its best version in the long term. And its evolution from January 2019 to now (+54%) far exceeds that of the Dow Jones Industrial and the Nasdaq.
Gold vs Dollar
As we have already seen in other posts on this blog, gold maintains a negative correlation with the dollar, so when the greenback falls, gold appreciates.
At the beginning of the year, the Dollar Index (which compares this currency with several international currencies: the euro, the British pound, the Swiss franc, the Swedish krona, the Japanese yen and the Canadian dollar) was at 96.5, while the dollar was trading at $1,514 an ounce.
As of mid-October, the Dollar index has fallen to 93.8, while gold is trading at $1,923 an ounce, which means that the dollar has lost 3% year to date, while gold has revalued by 24%.
In the longer term, since January 2019, the Dollar index has fallen from 96.8 to 93.2 (-4%), while the price of gold has grown by 48%. As pointed out by Smart Investor, this may suggest that investors are concerned that the dollar may continue to fall.
Gold vs Interest Rates
In addition to the US dollar, gold is also negatively correlated with interest rates. Since the beginning of the year, the central banks of the main countries have reduced interest rates, in many cases to almost zero.
For example, at the beginning of 2020, the Federal Reserve interest rate was between 0 and 0.25% in March . Last September, the Fed confirmed that it would keep rates close to zero until at least 2023.
In the Eurozone, Japan, the United Kingdom, Canada and Australia, rates are also at record lows. This is a favorable factor for gold, as the state of interest rates means that yields on treasury bonds, an asset with which gold competes for investors’ favor, are also close to zero or even negatives.
The fear index
Another point in favor of investing in gold is the feeling of fear that investors face in the face of a possible second wave of the pandemic and other sources of international geopolitical instability, such as the presidential elections in the United States. There is an economic indicator that makes it possible to measure the intensity of this ‘fear’ among investors: it is the VIX index , also called the ‘volatility index’. While this is not a perfect measure of fear in the markets, it does provide a gauge of how investors view the future.
Thus, when the VIX index is at a high level, it may be an indication that investment in the stock markets is uncertain. And when it goes down, the stock price is expected to be less volatile.
The more volatility there is in the markets, the more positive it is for gold, as investors tend to look for safe-haven assets like gold in which to invest their money.
Last March, this index shot up to 85 points, coinciding with the moment when the Covid-19 pandemic had spread to many parts of the world. At that time, the price of gold rose from $1,474 to $1,617 an ounce.
Although the VIX index has returned to its normal levels (around 25 points), the price of gold remains high, and is expected to remain so throughout 2021.
The future of gold
The conjunction of factors that have allowed gold to reach its all-time high during 2020 are still, for the most part, valid.
Among them is concern about the ability of companies to recover the level they had before the pandemic; the unprecedented policies of support for economies by central banks, which could lead to the devaluation of paper money, especially the dollar; the low level of interest rates, which will remain so at least until 2023; and the rise in inflation.
Precisely, the combination of low interest rates and high inflation constitutes an explosive cocktail that can continue to push up the price of gold.
To this must be added the foreseeable continuation of international geopolitical instability, which will not subside after the US elections, until a viable vaccine for Covid-19 is found.
In short, everything indicates that gold will continue to rise and, in any case, it is an active refuge that should be bet on in times of instability like the current ones.