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Analytics, 28 July 2020

Gold peaks highest price in history as USD slumps

The gold price hit a new all-time high – crossing the $1,900 an ounce, just two weeks after rising above $1,800. On Monday morning, the gold spot price rocketed to its highest price in history: $1,943.93 an ounce.

Gold started the year just above $1,400 an ounce and has been rising over the months due to a combination of factors including the uncertainty surrounding the Coronavirus, the oil price war, and now the rising tensions between China and the United States which have led to the slump of the dollar.

Historically, gold has played the role of a safe haven and has risen during times of fear and anxiety among global investors, and the pandemic appears to be a very good reason for the commodity to scale new highs. There have been record investments - with exchange-traded funds (ETFs) now holding a record 3,300 tonnes of gold.

Analysts believe gold is rising not because of some great fears of an economic depression, but simply because the American dollar is plunging.

Gold is rising because USD is slumping

The gold rush started again last week when the dollar slumped to its weakest levels against the euro in 22 months. The dollar is traditionally an investment competitor to gold. The dollar is under pressure as it is currently not offering an interest rate that is above inflation - and investors don’t believe the US central bank will hike rates any time soon.

Gold is benefiting from expectations that massive amounts of quantitative easing – when central banks create money out of thin air to pump into markets – will eventually trigger inflation. Theoretically, high inflation is good for gold. Inflation means money loses its value, which encourages investors to turn to gold.

The dollar also took a hit last week amid worries about the economic fallout of the coronavirus pandemic, as well as new China-US tensions. On Friday, the Chinese government ordered the closure of a US consulate in the city of Chengdu. Earlier last week, the US government demanded that the Chinese government closes its consulate in Houston, Texas. Since then there have been inflammatory speeches from both rivals, which has exacerbated the situation.

Should you buy gold now?

Gold is an important diversifying investment that every investor should have in their portfolio, regardless of whether one is worried about a geopolitical crisis, inflation, a declining U.S. dollar or just protecting their wealth. It’s an asset of its own and does not correlate to stocks, bonds, or real estate. Analysts believe there is plenty of room for gold to run. For example, Goldman Sachs has maintained a 12-month price target of $2,000 per ounce. Goldman Sachs first predicted in March that gold price will hit $1800/ an ounce in 12 months, and gold has surpassed that price in less than six months.

The gold rally will continue as interest rates are set to remain close to zero for years to come as the US dollar continues to face significant pressure.

For investors in the developed world, investing in physical gold makes sense, because many of these countries now sit with negative interest rates. However, investments in gold should be part of a diverse portfolio as gold can be quite volatile.

Nonetheless, there are plenty of gold skeptics, among them the investment guru Warren Buffett who has repeatedly bashed gold over the years, most recently calling it a “magical metal (that is) no match for the American mettle.

The skeptics note that gold is an emotional asset that performs well when there is turmoil in the world’s economy. Apart from jewelry demand, gold doesn’t have any intrinsic value, and – unlike the shares of listed companies - also don’t offer any dividends or other types of income to its investors.

How to invest in gold?

There are different ways of investing in gold. One can buy gold futures, gold coins, gold ETFs, Gold Mutual Funds, Gold Bullion, and even Gold Jewelry. Any of these gold products can be purchased relatively easily.

In the current market environment, it may be wise to invest in Gold Futures or mutual Funds. Futures is a derivative financial instrument, a contract to buy or sell the underlying asset on a certain date in the future, but at the current market price.

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