2020 has been the year of uncertainty, and this has seen the price of gold reach record highs. How have US election results and news of a COVID-19 vaccine affected gold’s performance, and what’s next?
Markets regained a sense of status quo after the result of the US election and assurance that Joe Biden will take the Presidency in January. News of vaccines that work effectively against COVID-19 has also propelled this sentiment: driving demand for risky assets while demand for gold levelled off.
Recent price movements although large, are not unpredicted. Gold has seen approximately 16 single-day price drops of more than 4% over the last 15 years, the most recent this past August. In this particular case, gold’s pullback was primarily driven by positive market sentiment (risk reduction) following Pfizer’s announcement and aided by investor positioning (momentum).
The key question facing gold investors now is whether this the start of trend reversal, a temporary move, or perhaps an opportunity to buy.
To understand gold’s performance, it is important to consider its four key drivers:
● Economic expansion: periods of growth are very supportive of jewellery, technology and long-term savings
● Risk and uncertainty: market downturns often boost investment demand for gold as a safe haven
● Opportunity cost: interest rates and relative currency strength influence investor attitudes towards gold
● Momentum: capital flows, positioning and price trends can ignite or dampen gold’s performance.
Gold has regained some ground since it’s drop in November and early December, and while price volatility may persist in the short term, we believe this could be seen as a buying opportunity for many strategic investors. The reasons are three-fold:
Consumer demand may start to see signs of recovery. The price correction and slightly more positive economic outlook may revitalise gold’s consumer demand, removing – at least in part – one of the significant headwinds it has faced this year. Historically, Indian and Chinese consumers have often used price dips to buy gold. And we have seen similar behaviour among more strategic Western investors.
Investment demand is not likely going away. While news about the vaccine is definitely positive and rightfully fuelling optimism, there are still challenges ahead. These include further trial results, peer review, approvals and distribution logistics which may delay its rollout to the general public, thus maintaining a level of uncertainty over the coming months. And some significant risks that existed prior to the COVID-19 pandemic remain as contributors to heightened global uncertainty (for example, Brexit, political gridlock in the US, trade tensions, etc). But perhaps more importantly, the pandemic has already had a significant negative impact on the global economy that will take time – and a lot of stimuli from governments – to overcome.
Loose monetary policy will reshape asset allocation. In addition to the fiscal largesse, interest rates are set to remain very low for a long time. As we discussed in our mid-year outlook, this may not only result in high inflation but is likely to re-shape asset allocation strategies for years to come. Amid such an environment, gold could play an increasingly relevant role as a diversifier and source of returns.
Where do we go from here?
2020 has been dominated by both the COVID-19 pandemic and the US election. As we begin to slowly move past these two events, investors are understandably looking ahead. Could the elevated levels of interest we have seen in gold this year begin to fade? We don’t believe so. We have seen a marked change in how investors are perceiving and using gold over the past couple of years, and with questions swirling about the effectiveness of traditional asset allocation models going forward, there is likely to still be an important role for gold.
Learn more about gold’s role as a strategic investment on Goldhub.