Gold smashed the $2,000 level and did not stop until reaching $2,055 yesterday. For those familiar with the famous “Reminiscences of a Stock Operator” book by Edwin Lefevre, Livermore had a saying – whenever a market prepares to take a round number, it does not stop at it.
The same with gold – it threatened to break the $2,000 level for some time now, and it managed to do so in a wild fashion – it did not stop until $55 later. What drives the gold price higher, and why are investors keep buying the curious yellow metal?
Commodities During the Coronavirus Crisis
Commodities, like gold, are viewed as protecting a portfolio against inflation. However, inflation is nowhere to be seen (not yet). But not only gold is up and running – silver or lumber too. Are investors anticipating an inflationary spiral? Or is it just the USD that declines significantly?
The USD is certainly one key element of the equation. However gold did make a new all-time high not only against the American Dollar but also against the Euro or Swiss Franc. In other words, we may say that the fiat currencies have a problem against gold.
So what drives the price of gold higher? Central bank? Not really – gold buying by central banks declined when compared with 2019. In the first six months of this year, central banks bought only 233t of gold, almost 40% less when compared with last year.
Is it jewelry demand? No – it fell to an unprecedented level, as it is supposed to in times of crisis.
The one area that contributed significantly to the rise in gold is the investment area. ETFs or Exchange Traded Funds contributed to the rise in the price of gold as inflows accelerated in Q2 when compared with the first quarter of the year. As a comparison, the first half inflow in ETFs surpassed the 2009 annual record – a year that defined the Great Financial Crisis.
Unless something changes significantly, the price of gold is poised to continue higher. The only question that remains is how high it can rise?
Investors are trapped between big tech stocks and gold, as the fixed income universe offers a negative yield. Central banks did a good job of propelling stock prices via lowering the interest rates and making fixed income less attractive. Commodities and stocks are a logical destination for funds in times of crisis – and by stocks, I mean only big tech stocks.