By Dylan Howse
Since March of 2020 when the virus truly began to take hold of the world, gold miners’ stock and gold futures have all risen dramatically. Why?
Fear and interest rates.
Gold acts in the market as a safety net against a declining economy and dollar. If the economy is performing poorly, the government and banks will start to reduce interest rates to combat the lack of economic activity. Yet, every time they reduce the rates, people are consequently earning less and less money from interest. Simultaneously, gold becomes a more attractive asset to store wealth within instead of cash resulting in higher prices because of its stability and increasing demand. Contrastingly, a rising interest rate means people can make more money from the current rates than they can in gold causing gold prices to fall.
COVID-19 has caused this effect to act on an extreme level as there were already historically low-interest rates in place before the coronavirus, said Eric Rosengren, president of the Federal Reserve. The federal funds rate in the US hovered around 1.5% in late 2019 after three rate cuts through the second half of last year and they now sit near 0%.
Due to these harsh rate cuts and fear in the economy, gold futures have risen roughly 42% since the start of the pandemic. This is an all-time high as it peaked in August as investors sought out a haven amid the spread of the virus.
“The slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult,” said Rosengren meaning that gold might be here to stay for a while until nations get their feet underneath themselves.
However, gold’s high price around the world may be its downfall as nations are starting to cash in. Global central banks sold a net 12.3 tonnes of gold over the last few months, according to estimates published by the World Gold Council, an industry-backed body.
“All central banks around the world are facing a lot of pressure for liquidity…Now is not the time to hoard gold, the hospitals need the money,” said Bernard Dahdah, an analyst at Natixis in Paris.
So, what does the future hold for gold? Some experts say that the US news cycle may have a large say in what happens to gold prices going forward. Although Joe Biden is widening his lead in the polls, investors are saying it’s too soon to count out turmoil just yet, and as we know, gold is the number one beneficiary of uncertainty.
“Gold thrives on uncertainty: we’ve never had an election in my experience in the U.S. that is as uncertain as this, and as uncertain a political environment as this,” said George Milling-Stanley, chief gold strategist at State Street Global Advisors.
This comes off a volatile week in the market as President Trump and Joe Biden had their first messy debate, Trump was diagnosed and admitted to hospital for COVID-19, and Trump halted talks on an economic stimulus bill.
“This time around it’s a little bit different…It’s not just the outcome of the election, but the process of the election. That sort of uncertainty,” said Darwei Kung, head of commodities and portfolio manager at DWS Group.
With 0% interest rates and built-up tension in the world as well as in US politics, gold could reach a new peak next month as America decides its next commander in chief on November 3rd.