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Gold: The Last Safe Haven Standing

Gold Safe Haven - Blackwell Global - Forex Broker

Gold Safe Haven - Blackwell Global - Forex Broker

While 2020 has been tough for many, that hasn’t been the case for the shiny yellow metal. In fact, the year has possibly been one of the best periods for gold. In August 2020, gold prices hit $2,000 per ounce for the first time in history.

Gold Price - Gold Safe Haven - Blackwell Global - Forex Broker
Gold Price – Gold Safe Haven – Blackwell Global – Forex Broker

Source: GoldPrice.org

In 2020, the precious metal moved from a fringe investment option to a favourite for almost every type of investor, from newbie traders to serious investors. In fact, a recent survey showed that 1 in 6 Americans invested in gold between April and June 2020. Another 23% were thinking of investing in gold in the near future.

A Steady Ship in Turbulent Waters

Gold has been an important part of a diversified portfolio even before the pandemic. But during times of economic upheaval, gold has shone its brightest. Gold prices increased manifold during the stagflation of the 1970s, finally peaking at $850. During the 2008 financial crisis as well, gold prices surged, reaching almost $1,900 in 2011.

So, what makes it such a great investment during times of uncertainty? Gold is seen as a safe haven investment. Its value can fluctuate, but over time, it tends to hold its value quite well. This makes investors flock towards gold during economic crises. It is even used as an inflation hedge.

Other common investments, such as the stock market, have seen tremendous volatility and an ongoing slump. In fact, between February 24 and 28, 2020, the biggest one-day declines were reported by the Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500 Index, since the financial crisis of 2008. This was just the start of a long volatile period.

Stock Market Performance - Gold Safe Haven - Blackwell Global - Forex Broker
Stock Market Performance – Gold Safe Haven – Blackwell Global – Forex Broker

Source: Bloomberg

On March 12, stocks across Europe and North America experienced a fall of greater than 9%. This was the largest single day slump since the Black Monday of 1987. In fact, there have been 4 instances of circuit breakers in 2020, which is unprecedented. Such market behaviour pushed investors away from stocks and towards gold.

Interest rates have also been at record lows. The US Federal Reserve has been aggressive in its policy, keeping the interest rate range bound at 0% and 0.25%. The benchmark interest rate of the Bank of England is also at a historic low of 0.1%. There have even been considerations of a negative interest rate by the BoE, to bolster the economy. This has led to people moving away from low yield investments, shifting to gold.

The Last of the Safe Havens

Generally, gold is not the only safe haven for investors. There are 2 others that have shared the safe haven status for years. These are the US dollar and oil. But in 2020, both the US dollar and oil prices have slumped.

A Weak Dollar

The US dollar started 2020 on quite a strong note. It achieved a three and a half year high in March. But as covid-19 hit the economy, it started tumbling. In fact, between March and August, the USD lost 5% against the Korean won, almost 10% against the euro, 4.5% against the Japanese yen, and 2% against the Chinese renminbi.

Dollar Euro Exchange Rate - Gold Safe Haven - Blackwell Global - Forex Broker
Dollar Euro Exchange Rate – Gold Safe Haven – Blackwell Global – Forex Broker

Source: Geopolitical Intelligence Services

One of the reasons for the slump has been the inability of the United States to control the coronavirus spread, while many other countries have managed to flatten the curve quite effectively. This has helped their economies to recover. But in America, cases are still on the rise, at an alarming rate, and the economy is suffering. There has also been a decline in global trade ever since the pandemic. This has led to a decline in the demand for the global trading currency, the US dollar. The slide in the value of the dollar is also a reaction to the record low interest rates and increasing US trade deficits.

The Oil Slip

The situation seems even worse for crude oil. In April 2020, the WTI crude oil price reached a record low of –$37.63 per barrel. Oil producers were worried that they would run out of storage space by May and were under pressure to move the product. This led to a unique situation, where the seller was paying the buyer for the oil.

This drastic fall in prices was largely due to demand drying up. With lockdown measures in place throughout the globe, travel and trade took a serious hit. Most flights were cancelled, road travel limited and even transport of goods hampered. In addition, Russia and Saudi Arabia were engaged in a price war during the pandemic. This pushed oil prices further down.

With the US dollar and crude oil losing their safe haven status, the only option left for investors is gold. Hence, the tremendous increase in interest.

All in all, with the covid-19 crisis and the ensuing economic uncertainty, investor interest in gold is expected to continue to rise. In fact, some economists expect it to touch $3,000 per ounce before the year end.