Gold reaching new highs
Gold as a commodity is a popular investment. Investors can access it through the stock market, where they can invest in gold bullion or buy shares of gold-mining companies. Alternatively, investors can also invest in the commodity through more complex investment vehicles such as futures contracts and derivatives.
Gold is priced in dollars and its price usually moves inversely to the US dollar.
Gold has been used by investors in modern history to diversify their investment portfolios.
Due to gold’s prominent history as a currency and a store of value, in modern history it tends to be used as a safe haven to help investors navigate and hedge against some of their riskier, more volatile investments.
In times of crisis, i.e. a pandemic, the stock market becomes increasingly volatile due to the uncertainty and disruption businesses have been facing. As a result, in the early days of the pandemic we’ve seen some stock indexes reaching record lows. More recently, we’ve seen stock indexes make a complete come-back and stocks reaching record highs. This volatility has continued to put investors on edge.
This uptick in the performance of stocks is mostly owed to central banks’ efforts to pump billions into countries’ financial markets. These billions, however, in the longer-term can increase inflation and weaken the value of currencies.
To shield themselves against the risk of inflation and a decrease in the value of a currency, investors tend to move to safer investments such as gold. As demand for gold continues to rise, its price rises. This has driven the price of gold up 27% from the year before, outperforming other commodities and most stock and bond markets.
Other factors contributing to the rising price of gold
- As mentioned above, central banks’ (the Federal Reserve in the US) financial stimulus has prompted a stock market rally that is unlikely to continue in the current climate without the assistance of further financial stimulus.
And as the subject of further stimulus is still a matter of debate in the US, gold has gained more interest from investors, especially the ones that view the reliance on stimulus as artificial.
- US China tensions have been escalating over the past couple of months and we’ve been seeing more tit-for-tat action between the countries. The unpredictability of such actions tends to make investors more nervous and as a result, stock markets more volatile. This further justifies the movement away from US stock markets.
- Other investments regarded as generally safe include bonds, such as US government bonds, which are considered one of the safest investments.
Bonds are usually preferred over gold as they pay interest, meaning that investors could eventually receive more than they pay for the bond.
However, with interest rates being at an all-time low, longer-term interest rates (yields) on government bonds have also fallen. Additionally, since high inflation is expected over the next couple of years, as mentioned above, and bonds tend to be repayable after a couple of years, investors accounting for inflation have deduced that they may be losing money down the line with the pre-set interest on the bond.