Few markets have been hotter than the gold market in 2020, with demand propelling the yellow metal to all-time highs earlier this month. What is the cause for the explosion of gold demand and prices and will this continue into the year-end?
Thus far, 2020 has been an outlier year for financial markets with gold being no exception. Covid-19 has at times weighed down markets, while simultaneously provided a steady dose of grim news.
Such a scenario is the perfect environment for gold bulls and not surprisingly, the demand for gold has sky rocketed over the past few months.
This in turn has also led to the eclipse of the psychological $2,000 mark and fresh highs earlier this August.
Why Is Gold Rising Now?
Gold topped out at an all-time high of $2,066 this month, helped by the weakening of the US dollar. As these two instruments are highly correlated, gold seems to have no issue besting a previous high of $1931 set back in August, 2011.
There is more at work here than simply the weakness of the US dollar, however, and there are more factors impacting gold’s rise in recent months.
The newswires and forecasts have been steady deliverers of bad news and warnings of a full-blown global recession.
These fears have been corroborated by recent tranches of economic data in the United States, which saw the largest drop on record of GDP in a quarter in Q2.
Looking globally, the International Monetary Fund (IMF) is already projecting a 5% annualized decline in the world economy in 2020.
As such, the world’s leading central banks have decided to juice up their respective financial markets by injecting billions to help stabilize economies throughout the developed world.
In Europe and the United States this has resulted in billions in new currency being printed.
An abrupt increase in the available money supply has led to lower interest rates, while also increasing the amount of currency in circulation.
Consequently, 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. Gold has long been labeled as the best option during gloomy or uncertain times.
With Covid-19 not even close to being controlled in most of the developed world, it is likely this trend will continue in Q2 2020.
Gold Not the Only Metal Experiencing a Boost
The price of silver has also spiked in recent months, up 25% in July alone. The white metal has netted an even larger increase than gold over this interval.
Despite this increase, the price of the white metal is not even close to its all-time highs and is still seen as undervalued.
With gold markets supercharged at the moment, silver could be an obvious benefactor as investors look to put money into precious metals.
The ratio between gold and silver is also suggesting silver is very undervalued at the moment, which could see further area for growth.
Since topping out earlier this month, both gold and silver have retreated somewhat, paring some recent gains.
However, 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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