At the beginning of 2020, many expected the high price of gold in the investment market to drop with expected profit-taking after a healthy rise and appreciation in 2019. That was before Coronavirus became well-known around the world, and well before it spread to the West from Asia. By the end of June 2020, gold had reached $1781 per ounce, well within striking distance of $1,800 and proving May growth projections correct. Much of that rise has been clearly due to the instability of economies, market flight to safety, and the need for hedges against investments risk based on companies pounded by COVID-19 profit losses. More notably, the price point was just $16 over the highest price reach for the last 7.5 years, and six months or so were still left in 2020 to go further.
The driving push for gold demand has been and continues to be a need for financial safety. With COVID-19 caseload dramatically predictably rising in the U.S. after the Memorial Day holiday and the numerous civil unrest protests across all of the American major cities, it was simply a matter of exponential math what would happen some three weeks later in new caseload identification. However, the fact that the same spiking is occurring in India, as well as completely uncontrolled in Brazil, has many in multiple economies realizing another slowdown and financial hit is about to happen again to hold onto some kind of semblance of public health. And while Europe seems to have stabilized and Asia is actively capping their caseload, the rest of the world is on the brink of more recession-pounding. And that repeatedly stokes the demand for gold from what MyGold has seen over the years.
Why is Gold Still a Financial Protection in 2020?
The same reasons why gold has been a protection for decades before continues to carry forward in 2020. When the world started to struggle with economic depression in the 1920s and 1930s, it was those who kept reserves of physical gold who were able to protect their wealth and easily afford to maintain their lifestyle while others collapsed. Gold has repeatedly been the go-to resources for value protection when everything else becomes shaky, and even in war the countries that had the most gold in their name were able to pay for resources and munitions others could no longer find or get because their cash was worthless. Gold was such a critical resource in World War II, Germany stole it from all the countries it conquered, and the U.S. and Russia consolidated as much gold as they could keepsafe for others or take. It wasn’t until the 1970s that the world unhinged itself market-wise from gold reserves and instead based value on gross domestic product (GDP), which was not that long ago.
Considering the factors in play today, gold has many looking at it for protection again. Here’s why:
- The U.S. Federal Reserve warned recently that if COVID-19 is not properly checked and controlled, American unemployment will skyrocket again, destroying communities and businesses at all levels.
- Many international markets hinge on the U.S. as the “great consumer,” who needs to keep buying to support international markets and related production.
- Both Asia and Europe have effectively stalled COVID-19, but they are extremely exposed at their borders to migration and travel which could bring in new cases by the thousands. That can easily happen as other areas weaken and refugees begin to move to escape the impact of collapsing economies at home.
- Central banks and government benefit programs can’t produce stimulus funding forever, borrowing on government debt. At some point the markets either need to stand on their own legs or fall down.
- Inflation risk is high. When a domestic economy begins to falter, it’s currency begins to lose strength and reputation. That in turn requires more of the currency to buy the same goods and services. That kind of inflation eventually becomes a runaway train, making gold the only sure asset that will buy what’s needed because it is universally accepted.
What is the Realistic Outlook of a Price Increase?
By the end of June gold had risen another 17 percent. Many company stocks either were breaking even from March losses or still down by 5 percent. Given the increasing demand with no reason for it to stop and fall back since COVID-19 is still in play, gold has plenty of realistic room to keep rising through the end of 2020.
As much as people are fearful the gold bull market is going to end before summer, many experts believe otherwise. The world simply hasn’t dealt with as big an economic shakeup as is what is happening due to COVID-19. And if another pandemic comes along to add more kerosene to the fire, the situation will simply compound the need and emotional demand for financial safety, especially has large institutions begin to falter. The market price statistics speak for themselves. By January and February 2020, gold’s price point was floundering a bit but still gently rising and not dropping at all, which was the pre-2020 expectation for profit-taking. After a sharp drop to as low as $1,475 an ounce in the third week of March 2020, gold performed the classic V quick-recovery the rest of the market was supposed to have, and moved back up into the $1,700 range. Since then, the precious metal has continued to move like heart-beat, rising and then profit-taking, but increasing overall at a more pronounced angle since the beginning of June 2020. That was the trigger point when COVID-19 was supposed to be flattened in all major countries and things were supposed to get back normalcy. They didn’t.
As mentioned before, when economies weaken, their underlying currencies become damaged. That drives up inflation. Low yields on the currency side pushes investors as well as regular finance mechanisms to seek coverage in areas that preserve value. One such resource tends to be government bonds. However, if the government itself is weakening, then the next better alternative then becomes precious metals, most notably gold.
If, on the other hand, governments try to reign in their inflation risk but raising central bank interest rates, they in effect reduce the amount of currency available. This makes the remaining pool stronger. That also has the effect of reducing the value of gold because people’s currency holdings and their yields start to rise. Gold prices then fall. The U.S. Federal Reserve has no plan to raise interest rates right now and could drop them further in the hopes of loosening currency and increasing economic activity, most notably significant borrowing because it generates spending (think home sales). Europe and Asia tend to follow suit because they are major suppliers to the U.S.
All of the above argues for gold to keep rising. The U.S. Federal Reserve has already made it clear it will keep rates low and maybe lower for an extended period forward. Until people are spending again, the U.S. central bank sees no reason to push in an opposite direction with monetary policy. At the same time, companies are likely to not hire back and lay off payroll again to head off another disaster with social distance as happened in the Spring. That means less people earning money, spending, and buying, which in turn means less demand for goods and services and less manufacturing. The vicious circle literally demands some kind of outside injection to create spending power again. While government stimuli benefits were expected to do this in April 2020, instead people paid down debt or socked the funds away in savings, circumventing the desired spending effect.
The entire picture taken to an extreme projection begins to start to resemble the 1920s again in Europe. Weak governments and weak currencies struggle with weak spending and high rates of unemployment. Currency becomes useless and gold becomes the hard resource to have to buy anything.
Will Gold Break $2,000?
Goldman Sachs already answered the price point question and projects gold to easily break $2,000 by 2021. Citi analysts as well as other experts were also in the same camp seeing a similar price rise and strengthening of gold. The economic picture for alternative investing doesn’t look good; the International Monetary Fund projects the world economy to instead collapse into itself by 5 percent, which will likely continue even further due to ripple effects across different industries that rely on each other. Is their project unreasonable? Not at all. For example, during the real estate bubble recession that hit in 2009, gold ran from $700/ounce to as much as $1,900/ounce by Fall 2011.
However, not everyone is arguing for buying more gold. Some market watchers believe that China and Southeast Asia now have an opportunity to flex their muscle, and their markets will explode with growth as the rest of the world stumbles. Effectively containing COVID-19 in their borders, these regions will attract investments and move towards growth. That in turn will create an alternative to hiding behind gold, driving the price down in this alternative perspective at least by the end of 2021. While COVID-19 definitely stands to significantly weaken Europe and the U.S., Asia, and China stand to gain in the shift.
Another factor people forget about is the fact that China is also a major holder of U.S. debt currently (second to Japan). If the country chose to do so, it could flood the international market with dollars, liquidating its holding and driving down the value of the U.S. dollar. Doing so would hammer the American economy further and push those seeking strength and a safe haven deep into Asian markets and Chinese investments. While this play is out in left field, the U.S.’ continuing political tensions with China forces projections to have to consider this risk as well. For a near future gold price, this play strategy would drive gold demand up further as more funds drain away from a bleeding U.S. market rolling in sudden inflation. And it wouldn’t be for ETFs or proxy holdings, gold coins and physical lots would be sold for premium. MyGold currently stocks one of the most extensive government gold coin catalogs in New Zealand to choose from as well.
What Would Drive Gold Prices Down?
As morbid as it sounds, after the panic of a stumbling economic drives gold up, it would be a significant mortality loss that drives gold down in such scenarios. If one looks at the example of what happened after World War II, gold fell back through a 25-year decline after spiking during the early 1940s. The same occurred from 1915 to the early 1920s during the end of and after World War I. Again, the same pattern plays out after 1973 and the end of the Vietnam War. The next 50 years tie instead to the market booms, but there is also the absence of major, global military conflicts. The bottom line is, when millions are being killed by war, the after effect is that there are less to feed, house, clothe and provide jobs for. The remaining resources last longer for fewer, and demand falls to what can be provided instead of outstripping supply.
If COVID-19 or a similar pandemic produces a similar outcome in population shrinkage, the gold price forecast will spike at first as it did during major wars, and then it will drop significantly, maybe even below $1,000/ounce, believe it or not. There simply won’t be as many people around to keep driving demand for goods, resources, land, consumption, and production. With demand cut supply is more evenly spread, and price gouging becomes a thing of the past. Gold futures drop accordingly.
So, what is the likelihood of a pandemic gold-drop occurring? It will take a very virus or sickness that has the combination of being lethal but easily spread to happen. That’s actually a very hard mix to develop in wild nature. Very lethal viruses like Ebola fizzle out because they kill their victims too quickly. The Spanish Flu, on the other hand, spread far and wide because it had incubated for longer wiping out tens of millions of victims. HIV spread far and wide because victims live longer as well, but it doesn’t kill rapidly, allowing more time. The so-called “perfect mix” would have to be a virus or sickness nobody has ever had, spreads by breathing, there are no antibodies, and it doesn’t have a cure with a high mortality rate. COVID-19 has come close, but while it’s causing many deaths, the mortality rate isn’t statistically very high. So, a gold drop due to the Coronavirus is unlikely. It would take a double-whammy of another pandemic to occur to get us in this price-drop range seen after major wars.
Alternatively, if a vaccine is developed for COVID-19 in 2020, that event could drive gold down if the vaccine works and can be distributed rapidly. The ability to return the labor force back to work internationally would increase spending demand again, allowing economies to recovery. Gold demand would begin to drop as investment moves back into the market seeking to take advantage of depressed values that would now begin to start rising again on the business side of things (i.e. buy low, sell high).
However, a vaccine has not been looking likely in the next 120 days from July 2020, even with advancement at Oxford University. Significant work already done is finding that antibodies developed from COVID-19 exposure are not sticking around permanently to provide a biological defense to the virus that we would normally generate with something like the flu, for example. That negates the value of a vaccine and instead shifts attention to finding effective treatment instead; in other words, the virus wins and medicine tries to come up with a cure pill to make the effects less deadly or tolerable, like penicillin.
In Short – Gold Is Going to Keep Climbing Near Term
Given all the above as well as other developing factors, anyone asking will gold prices rise or fall in 2020 can pretty much be answered with a strong likelihood a rise will happen further before an eventual decrease and profit-taking. The effects of 2020 are still in development, and the economic impact of COVID-19 is still in the expanding stage with economies worldwide. Both clearly push hard for gold to keep rising before it does eventually fall back again. And without a clear cure insight in 2020, gold isn’t likely to drop before the year is out. If you want to start an investment position in gold or expand what you already have for a greater market play, MyGold can help. With a solid inventory including an assortment of bullion choices and sovereign issues, as well as security options to protect your physical holdings, MyGold provides a comprehensive approach for gold investing for any investor, beginner or experienced.