Central Bank Monetary Policies are the Catalysts Gold Investors Have Been Waiting for
Diversifying one’s financial portfolio is always a solid approach. There’s no need for putting all of the eggs in the same basket. Gold has seen a major surge in recent years, and some expect this trend to continue for months to come.
Fueling Demand for Gold
If the coronavirus pandemic has taught one financial lesson, it is how central banks can significantly influence the markets. This has become apparent all over the world. All of a sudden, tax payments could be delayed, citizens and SMBs receive free handouts, and so forth. Under normal circumstances, this would never be possible.
Handing out free money to companies and corporations is one thing. Ensuring that it doesn’t devalue the existing economy is something else entirely. The price of gold jumped to an all-time high in April after the Federal Reserve introduced a new stimulus package. Every package comes in the form of printing more money and investing it into the economy.
Those investments often occur by buying treasuries, bonds, and even propping up stock prices. An interesting approach, but one that cannot be sustained for longer periods of time. As concerns over a second COVID-19 wave remain in place, financial repercussions will be felt all over the world. It will not be a pretty outcome.
Global Gold Demand Rises
Following the April stimulus package, demand for gold continued to rise in April 2020. Not because consumer-focused sectors were in dire need for precious metals, but primarily because investors want physical bullion in their hands. Hedging against financial instability requires hard assets capable of retaining — or, ideally, gaining — value.
By late April, a 1% year-on-year increase in global gold demand was recorded. An impressive gain, and one that would serve as a prelude to what was yet to come. Other than physical bullion, gold exchange-traded products also noted massive inflows of capital. Investors have been taking note of the global unrest, and are doubling down on precious metals.
Looking Toward the Second Half of 2020
Surprisingly, the bullish sentiment toward gal has only increased since then. Everyone with spare money is seemingly looking to diversify their wealth due to COVID-19. This has allowed the price to slowly trend higher, eventually approaching levels not seen since 2011.
Investor demand was so high that the market hit a proverbial roadblock in May of 2020. Whereas central banks continue to note a reduced demand for bullion, investors are taking the completely opposite approach. Central bank reserves have been depleted due to stimulus packages, leaving little room to keep buying precious metals.
Considering how spot gold prices nearly hit levels last recorded in September 2011, the bullish sentiment appears far from over. The road ahead will be bumpy, for a wide variety of reasons.
China recently reported economic growth — which seems rather unlikely — during Q2 2020. That report seems to boost confidence in stocks and mother traditional investments. There is also the decision by the ECB to not change current interest rates. A surprising decision when considering how Europe is dealing with spikes in COVID-19 cases across the board.
All of these decisions may temporarily appease traditional market investors. Whether they will lead to a decrease in gold’s price, is a different matter. Precious metals have their core strengths, whereas fiat currencies and stocks do not. The coming months may yield a new all-time high for gold, although nothing has been set in stone as of yet.