Following a pullback last week, both gold and silver have bounced back strongly so far this week. Gold has surpassed $2000/oz yet again while silver’s spot price now stands just above $28/oz. The steady improvement in both economic growth sentiment and market risk sentiment has been ongoing since March. Investors have continued to add gold and silver to their portfolios due to the balance they offer. As sentiment improves, gold offers a hedge against rising inflation while silver benefits from increased industrial demand. If sentiment deteriorates, gold and silver provide downside protection as safe-haven assets. 

Gold has surged past $2000/oz as pandemic uncertainty continues to dominate the horizon. The precious metal is now up over 34% year-to-date as investors are turning towards gold for both tactical and strategic reasons. Tactical investors are piling into gold futures and exchange traded products as a hedge against short-term risks of further economic damage from the ongoing pandemic. Investors remain aware that a vaccine breakthrough could take several months, and the economic recovery will be slow and difficult in the meanwhile. Equally, strategic investors are cognisant of the potentially inflationary scenario which may ensue once a vaccine is indeed developed but markets remain flooded with central bank liquidity. It might not be easy for central banks to withdraw liquidity very quickly and inflation could tick up. Gold will serve as an effective hedge in such a scenario.

Gold is trading at record highs of $1943/oz (as of 27 July) making a sharp ascent in recent days. Several pertinent risks are driving investors towards traditional safe havens including gold:

 
1. Second quarter earnings may disappoint Wall Street

 
2. COVID-19 infections are still on the rise and vaccine hopes may be premature

 
3. Second quarter economic growth data for the US and Europe could serve as a reality check for risk assets

 
4. Tensions between China and the US are on the rise

 
With equities finding support from central bank stimulus, it appears that investors are turning towards gold as a put option to hedge their equity exposure in the face of the above risks. 

Gold is trading above $1800 for the first time since 2011 with the precious metal drawing strength from several forces:

 
• An uptick in speculative positioning in futures as infections rise in the US

 
• Geopolitical tensions between the US and China being back on the radar

 
• Weakness in the US dollar and further declining treasury yields

 
Gold is up over 19% year-to-date (as of 13 July), with investors turning towards the yellow metal as a hedge against:

 
• Currency devaluation due to highly accommodative monetary policy

 
• The risk of rising inflation

 
• Economic uncertainty and geopolitical risks

The US Federal Reserve (Fed) has indicated that rate tightening is unlikely to take place before 2023. This comes along with a bleak outlook by the central bank for the US economy in the wake of the ongoing pandemic. Gold, which is favoured by investors when economic risks are pronounced and rates are low, made gains of around 3% last week closing the week at just over $1730/oz.  

On Monday 13th April, gold hit the highest levels since December 2012. After a period of moderate performance, weighed by investors selling gold to raise cash, gold is starting to rally again. The scale of global fiscal and monetary stimulus we are seeing in response to the COVID-19 crisis is far greater than what we have seen in response to any other crisis. That may or may not be inflationary, depending on how quickly the economy absorbs the stimulus. It is very likely to be for the currencies of countries offering the most monetary stimulus. Gold – often seen as a pseudo currency – cannot be debased in the same way as it has limited supply. It certainly responds positively to periods of uncertainty. Gold appears to be rising accordingly.

Financial markets volatility and economic uncertainty have historically supported gold prices. Investors typically turn to the precious metal when systemic risks are high as they did following the 2008 financial crisis when a strong shock to financial market volatility, and the ensuing recession, were followed by a bull market for gold. With the coronavirus pandemic creating unprecedented economic uncertainty and having caused a volatility shock last month similar in magnitude to 2008, investor interest is supporting gold prices. 

Please read our latest blog on this subject here.

The price of gold surged past US$1600/oz on Tuesday 24 March, up from just under US$1500/oz on Monday 23 March, as the US announced a historic $2 trillion fiscal stimulus to boost the economy. Gold has experienced selling pressures this month as investors have turned to the precious metal for liquidity in the wake of large drawdowns in equity markets. The announcement of this significant stimulus from the US has brought some measure of calm to equity markets alleviating some of the selling pressure from gold. This is fuelling gold’s recovery at a time when investors are seeking safe havens to hedge against the uncertainty ahead for the global economy.

Gold remained under pressure last week as liquidity in markets was otherwise constrained. Speculative positioning on gold futures exchanges, an important driver of gold price, declined last week highlighting the selling pressure on the precious metal from investors seeking liquidity. Gold ended last week just under US$1500/oz. The safe-haven metal experienced similar pressures in the autumn of 2008 before rallying strongly over the subsequent 3 years. 

Gold to silver ratio is fast approaching 100, its highest level since 1991. A high value for the ratio indicates silver’s price weakness relative to gold. Silver, which derives nearly half of its use in industrial applications, is facing weakness in demand as economic activity around the world slows down in the wake of the coronavirus pandemic. The metal, however, is considered precious and has a strong correlation to gold, although its price can sometimes lag slightly behind gold.