The price of gold has been the only asset not in a total freefall of late as a result of the coronavirus, with investors still backing its status as a safe haven and store of value. After hitting a 7-year high of $1,700 prior to the escalation of the pandemic last week, gold is still staying strong near the $1,600 level.
Since late 2018, more and more investors have been flocking to the precious metal as protection from increasing levels of economic volatility. Fears of a recession have been steadily increasing as more and more warning signs become apparent, and that was before the chaos that has recently ensued as a result of the global COVID-19 epidemic.
Gold prices have also been boosted by the recent crash in the oil market, with prices plunging by nearly 50% year-to-date as OPEC+ talks have stalled. Russia has refused to cut its own oil output, angering Saudi Arabia in the process. The Saudis on the other hand, feel that chronic overproduction has become a serious problem and wants to further limit output among members to protect the group’s interests as a whole. In response, Saudi Arabia has retaliated with a scorched earth policy, drastically slashing prices for its buyers. The result is that the lines have now been drawn for an ongoing price war between Saudi Arabia and Russia.
Previously agreed production limits among OPEC+ members expire at the end of the month, which means that both Saudi Arabia and Russia can start pumping out as much crude oil as they wish on April 1. Just the mere threat of a price war has further damaged markets already shaken by the COVID-19 coronavirus, and a continuation will mean even more severe geopolitical consequences.
Ali Khedery, a former Senior Advisor for Exxon in the Middle East, feels that “$20 oil in 2020 is coming.” He goes onto explain that there will most likely be “huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19.”
This is in contrast to what experts originally predicted, which was a production cut to compensate for a decline in global demand thanks to the coronavirus outbreak.
While the combination of an oil war and the coronavirus could have continued devastating effects on the stock and bond markets, it could do the opposite for gold. The price of gold was up 5.8% just last week, and prior to the escalation of the coronavirus pandemic, the all-time high mark of $1,895 suddenly wasn’t so far off. While the climb to that zenith may be delayed for a few months until the world can recover from the virus, the bullish momentum is still there overall.
Gold has actually been the only asset hanging on as of late, as S&P 500 futures were down nearly 5% to start the week. Things didn’t get any better, as the stock markets continued to slide as news of the pandemic worsened. Besides oil, energy commodities have been struggling in general, with natural gas prices falling due to a massive drop in demand. United States bond yields are hitting new historic lows, with the yield on U.S. 10-year treasuries briefly falling below 0.5% this past week. The “safe haven” benefits of gold are now more apparent than ever, with the precious metal now poised for even more growth
These negative trends in the rest of the markets don’t look likely to change anytime soon, as the situation with the coronavirus still continues to worsen. Up until now, the markets have shown some resilience thanks to optimism that the outbreak could be successfully contained. These hopes are evaporating more and more every day though, with over 90 countries around the world reporting confirmed cases of COVID-19.
Marc Chandler, managing director at Bannockburn Global Forex, feels that “the containment of the coronavirus has failed.” He adds that “the precise economic impact may be unknown…but policymakers and investors do not need such precision. The direction of the shock is clear. The magnitude is less known, but a cursory look suggests the near-term economic impact is likely more moderate to severe rather than minor.”
Chandler also touched on what is perhaps the scariest element of the situation so far: the unknown. Investors, particularly those in Europe and North America, don’t fully understand yet how the virus will affect economic growth. Because of this, the markets are still potentially weeks or months away from a full-on panic, despite the heavy losses that we’ve already seen. What we are currently seeing could just be the tip of the iceberg.
Long story short, experts expect the price of gold to continue to stay strong as long as the coronavirus is dominating the headlines. Fears of a global recession will persist along with it, as interest rates approach zero or lower. All of this is great news for gold, and the bullish signals show no signs of letting up.
More and more savvy investors are stocking up on gold, and it’s not too late to get in at what is still a relatively low level. Even if the coronavirus is eradicated in a few months, many of the world’s top economies are still inching closer and closer to an inevitable recession. By investing in gold, you’re not only protecting your portfolio from the volatility of the markets, but you’re setting it up for significant future growth, as well.
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