Gold prices have hit a new high in nearly ten weeks, while the infection across the world pick up, putting a question mark over a quick recovery in economic conditions. The World Health Organization reported a total of 8.9 million confirmed cases of COVID-19, with the total rising by 152,325 in the last 24 hours.
In the global market, gold prices have surged to their highest at $1,769 in about eight years. So, if gold is rising, the markets must be sniffing out inflation, right? But this line of thinking doesn’t apply here. The world is experiencing the worst economic crisis of all times due to COVID-19, with inflation dropping drastically due to the pandemic.
Policymakers in the US, Europe, and Asia have slashed interest rates in an attempt to stabilize economies affected by reduced demand, disrupted supply chains, and paralyzed businesses.
Explained: Then why are gold rates rising?
The intermittent reports of the US entering into recession after 11 years have been circulating since last year. The expectation sparked a rally in the precious metal, and the COVID-19’s outbreak further added momentum to the rising gold prices.
To relieve the US debt market amid the pandemic, Fed was forced to announce a massive cash injection and bond-buying program of around $3 trillion, which somewhat explains the upward run in gold rates. The expansion of paper currency tends to push up gold prices.
Moreover, leading central banks of China and Russia have been buying the metal in bulk volumes in the past two years, which further triggered gold prices.
The declining interest rates around the globe offer another straightforward explanation for gold’s recent rise. Gold tends to go up when interest rates fall. This relationship makes sense because gold yields no interest, hence this commodity will be least attractive when interest rates paid on bonds are high.
According to economists, the opportunity cost of holding gold is high at times when interest rates go up. Here’s why gold has skyrocketed because Fed and central banks have cut interest rates to essentially low levels to fight deflation caused by the deep COVID-19 recession.
Will Gold Prices Crash?
Given the economic uncertainty, gold is expected to rise to $1,900 an ounce. However, any sudden sale of gold holdings by central banks in an attempt to tide over the financial slump or the sale of gold ETFs (exchange-traded funds) by investors to compensate their losses from other risk assets could stall the gold rise.
The economy is expected to pick up the pace by the end of the year 2021. When the economy recovers, investors start allocating their funds to risk assets like stock, real estate, and bonds and redirect their investment from gold, currencies, and government debt. This results in the rise of equity and risk assets, which significantly pushes gold prices down.
How long the adverse economic impact will last is anyone’s guess, but it won’t be short. The International Monetary Fund (IMF) has projected growth of advanced economies at -6.1 percent, while growth levels of developing and emerging markets are well above advanced economies.
The IMF has projected a negative growth rate of -1.0 percent and -2.2 percent, excluding China for these economies. This could mean that the gold rate is not going down anytime soon.
Faria Hameed is a freelance writer and content strategist based in Oman. She helps businesses with their online marketing endeavors, and plays badminton in her free time.