Why is the price of gold rising?

By Larissa Fernand |  27-07-20 | 
 
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Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

As interest rates dip across the globe, yield starved investors are flocking to gold.

Now add to it the uncertainty of a global economic slowdown looming large, and U.S.-China relations inching to a point of no return. Gold beckons as the safe haven.

As Mohamed A El-Erian, chief economic adviser at Allianz, recently tweeted, that investors continue to see gold as "one of the least unattractive risk mitigatory – adding exposure to both tactical and strategic portfolios.”

All this has led to a ferocious rally. Spot gold tops $1,900 per ounce. The last time the price of gold touched a record high was in the second half of 2011.

Here is what some experts have to say.

Mark Mobius, co-founder at Mobius Capital Partners, to Bloomberg TV interview

When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold. Gold price will rise as uncertainty does. Due to the pandemic, the supply output coming out of mines should decline, putting further pressure on the price of gold.

Ed Moy, chief strategist at gold retailer Valaurum and head of the U.S. Mint from 2006 to 2011, to Fox Business

Gold’s recent surge has some similarities to the last time the precious metal reached a new peak – in the aftermath of the 2008 financial crisis.

This time around, as during the crisis, the government has put together record fiscal and monetary stimulus. (Congress injecting $2.2 trillion, the Federal Reserve printing $2.2 trillion and extending another $5 trillion through loans to banks.)

By comparison, during the financial crisis, there was a total of $1.2 trillion of fiscal stimulus and about $4 trillion worth of money-printing over a 5-year period.

The scale of the COVID-19 stimulus is staggering compared with 2008, and raises the possibility of inflation.

Gold prices would continue to rise until a COVID-19 vaccine is discovered and several treatments prove effective.

Vivek Dhar, mining and energy commodities analyst at Commonwealth Bank of Australia, in the media

The fall in U.S. 10-year real yields has been the most important driver. The negative relationship between long-term U.S. real yields and gold futures has held up fairly well over the longer term. That is because when long-term U.S. real yields increase, gold is less attractive relative to U.S. interest bearing securities since gold has no income earning ability.

The weaker U.S. dollar is the second-most important driver of the precious metal.

 The ever-growing coronavirus infections and US-China tensions have also spurred safe-haven demand for gold.

Steven Dunn, head of exchange-traded products at Aberdeen Standard Investments, to Kitco

While gold’s rise above $1,900 an ounce has been dramatic, it is not surprising. The combination of escalating U.S.-China tensions and enduring fears about the economic impact of the coronavirus pandemic have provided plenty of fuel for this surge, and neither seem likely to dissipate in the near term. As investors continue to face volatility and uncertainty, the appeal of safe-haven assets like gold and silver will only increase.

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