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How gold yet again proved a safe haven in the year of pandemic

Kumutha Ramanathan
·Contributor
·3-min read
Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo September 17, 2010.  Spot gold hit a new record high of $1,277.75 an ounce on Friday, as investors remained concerned about economic prospects. REUTERS/Yuriko Nakao (JAPAN - Tags: BUSINESS IMAGES OF THE DAY)
Analysts see gold's value continuing to gain amid stock market disruption and global economies rebuilding themselves in the wake of COVID-19. Photo: Yuriko Nakao/Reuters

Gold (GC=F) is on a path to having its best year in a decade as equities have seen major fluctuations in 2020, driven by the COVID-19 pandemic.

This month, the haven commodity gained as the US dollar reached a record low, not seen since April 2018. This has led bullion’s value to keep rising. In early August, it touched a record high above $2,000 (£1,446.22) an ounce, fuelled by investors looking for an alternative to stocks and bonds, as well the dramatic collapse in US interest rates.

Gold (GC=F) was up 0.3% at around 3.15pm in London, sitting at $1,898.40.

Gold has been gaining all year as the wider stock market faced turbulence. Chart: Yahoo Finance
Gold has been gaining all year as the wider stock market faced turbulence. Chart: Yahoo Finance

As investors hunted for yield in 2020, stock markets offered little solace. London’s FTSE 100 (^FTSE) closed in early trading on Thursday down 1.5%, marking the end of the index’s worst year since 2008 as it was knocked by the COVID-19 pandemic. The blue-chip index was lower 95.3 points on Thursday to 6460 points, taking its total losses for 2020 to 14.34%.

In 2020, the FTSE 100 Index suffered its worst performance since the financial crisis.
In 2020, the FTSE 100 Index suffered its worst performance since the financial crisis. Chart: Yahoo Finance UK

Despite investor monetary and fiscal policy leading to deflation and currency debasement fears, analysts are divided on its 2021 trajectory.

WATCH: Will Interest rates stay low forever?

READ MORE: FTSE 100 posts biggest annual fall since 2008

Morgan Stanley says gold and other precious metals will face pressure as financial markets begin to stabilise and longer maturity bonds yields rise. HSBC, on the other hand, has argued that bullion will rise on continued uncertainty.

The UK’s Capital Economics presented a more mixed assessment, saying it expects the commodity to be trading at around $1,900 per ounce through 2021 as US real yields remain low.

“That said, we recognise that there are some key downside risks to our forecast,” said Capital Economics in a recent note. “US nominal yields could surge and investors could intensify their selling of safe-haven assets, perhaps because of a faster-than-expected revival of US economy activity.”

Capital Economics added that the market expects US interest rates to remain near zero at least until 2023, which would limit the drop in gold prices as the Federal Reserve would “almost certainly” step in to prevent nominal yields from increasing too much.

Capital Economics maintains that gold prices are unlikely to fall given the Fed's predicted interventionist behaviour should yields rise. Chart: Refinitiv, Capital Economics
Capital Economics maintains that gold prices are unlikely to fall given the Fed's predicted interventionist behaviour should yields rise. Chart: Refinitiv, Capital Economics

In addition, investors could choose to maintain their dependence on safe-haven assets, such as gold-backed ETFs, which saw their demand soar this year in the face of COVID-19-related economic uncertainty this year.

Demand for gold ETF's has been unprecedented in 2020 as investors poured into it to avoid wider stock market instability. Source: World Gold Council, Capital Economics
Demand for gold ETF's has been unprecedented in 2020 as investors poured into it to avoid wider stock market instability. Source: World Gold Council, Capital Economics

“We think that investment demand will remain high by past standards for some time yet,” said Capital Economics in a note.

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