The gold price has topped $1,700 as investors sought safe havens in response to the coronovirus crisis, which has sparked fears of a global pandemic.
A health catastrophe on this scale is unprecedented in a globalised economy, and it is unclear at present when it might start to subside.
On the financial front, market panics and emergency measures like last week’s 0.5 per cent rate cut in the US could be a sign of things to come, and may drive the gold price above its all-time peak of $1,900 in summer 2011.
Precious commodity: Investors see gold as a store of wealth, hedge against inflation and safe haven asset
The gold price has receded since yesterday to around $1,650, but financial experts say this is because traders are being forced to cash in positions in the precious metal to cover loans and losses in the stock market.
In pounds, the gold price hit a new record above £1,300 late last month, and it is at around £1,280 today.
However, this is still a currency-driven phenomenon – due to sterling weakness since the Brexit referendum – as gold is still well off its peak in US dollars, which it is typically priced in.
What causes spikes in the gold price?
Investors see gold as a store of wealth and hedge against inflation as well as a safe haven asset during financial and political upsets.
Interest rate cuts, or quantitative easing – money printing – particularly in the US, make gold more attractive to investors as this weakens the dollar and can fuel inflation.
But the gold price fell and then stagnated in the years following the financial crisis of 2008, as global stock markets boomed and inflation failed to materialise, despite the vast money-printing experiments carried out by central banks in the US, UK, eurozone and Japan.
Demand for ‘physical gold’, including coins and bars, can be driven by different factors. For example, the festival of Diwali is a popular time to buy gold jewellery in India.
But even when such demand is strong, it can be offset by volatility in ‘paper gold’, in the form of exchange-traded funds, held by institutional players like banks and hedge funds.
Meanwhile, a strong dollar makes gold more expensive and can this can deter all types of buyers.
And as, like gold, the dollar is considered a safe haven in times of trouble, which causes it to strengthen, these two trading trends sometimes work against each other.
Two decades of gold prices in dollars and pounds: All-time dollar record was in 2011
The top chart shows the price of gold in US dollars in the last 20 years, the bottom graph in pounds. Source: Bullionvault
What is happening to the gold price now?
‘Gold is once again having a difficult time,’ said Craig Erlam, senior market analyst at OANDA Europe, on Tuesday.
‘Buoyed initially by the sheer amount of risk aversion and monetary easing being priced in, which saw the price briefly move above $1,700, it’s since pared those gains and found support around $1,650 earlier today, with today’s slightly improved sentiment proving a drag.
‘Once again, it seems yesterday’s aggressive sell-off hindered gold’s ascent, with traders possibly forced to liquidate positions to cover margin calls or losses elsewhere.
What is a margin call?
Traders using borrowed money to fund their activities via ‘margin accounts’ face calls to top them up with extra money or sell some of their holdings when markets fall and they rack up losses.
Unlike ‘cash accounts’, which are funded in cash, margin accounts allow traders to borrow against the value of their holdings.
‘The environment generally remains bullish for the yellow metal though, with $1,700 likely to face further challenges.’
David Madden, market analyst at CMC Markets, said: ‘Gold is lower as some dealers are cashing in their long gold positions to cover margin calls on stocks.
‘The metal eked out a fresh seven-year high early into the trading session but the aggressive sell-off in equities ended up hitting the metal.
‘If we see a rebound in stocks we might see gold head back towards the $1,700 area.’
Adrian Ash, director of research at BullionVault, said: ‘Used for little else besides storing value, gold has served that role in all cultures in all ages.
‘It’s the only natural resource which investors flock to when its consumer demand looks set to drop.
‘Over the last seven days, trading volumes on BullionVault have jumped 102 per cent from the previous 52-week average, with more than £38.2million of gold, silver and platinum changing hands in total.’
How do you buy gold?
Savers have a number of ways of buying gold as an investment, writes Simon Lambert.
Physical gold is the main way to tap direct into actual gold, by buying bullion or coins. This can either be done through a traditional dealer or through an online service such as GoldMadeSimple, or BullionVault. You can read more about how to do this on the World Gold Council’s website.
Exchange Traded Commodities are also a direct route into gold. ETCs, like Exchange Traded Funds, track a particular sector, or in this case commodity.
They are passive investments and should merely mirror gold’s moves, although some will offer leveraged returns or the opportunity to short the price. Make sure you understand the difference between ETCs that are physical (actually buying gold) and synthetic (set up to mimic its price). Read this guide to ETFs.
Funds enable investors to buy into a basket of shares of gold miners, producers and associated companies. However, the performance of individual firms does not always echo gold’s rises and falls, and in fact, gold mining shares can fare worse than the gold price – especially smaller companies.
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