The Recent Gold Rally and Its Implications for the Global Economy
Gold – a heavy yellow metal that no one seems to get over. The metal was used as a primitive medium of exchange. However, even as years have passed and banknotes and coins have taken over the role, gold still unfalteringly retains its value and is considered as one of the best forms of investments globally. Apart from the latter, gold also serves other valuable purposes, such as crafting jewellery and conduction electricity due to its remarkable physical and chemical properties.
While gold holds great value globally, its demand is highest in countries like India, where it holds a cultural value. The heavy metal is used to create the equally heavy jewellery worn by Indian women at weddings, family gatherings and many important occasions. Also, some people even use it to pay off their personal loans and debts, and others prefer to request it as a form of security against any money they lend.
As mentioned earlier, despite the introduction of intrinsic/modern money, this precious metal never lost its value and is still considered the best alternative to flat currencies. Since 1970, gold’s price has risen by more than 5000%. One may argue that generally, the cost of living has risen altogether. Yes, that is true, what caused our grandparents a penny now costs us 100 dollars or even more. However, the rise and fall of the gold price result from factors that are far more volatile and sensitive than a typical consumer basket.
The recent surge in gold prices
Besides the normal fluctuations in the gold price, 2019, 2020, and 2021 have seen quite dramatic changes. While at times like mid-2020, gold price was at its highest in the past six years, at other times, it witnessed a sudden drop in 2021. Nevertheless, the volatility still persists. The aim of this article is to look at the key drivers behind the recent surge in price, the relationship between the gold, dollar, and cryptocurrency, and determine what the future holds for us.
Key drivers of the gold rally in 2020
On the 20th of August 2020, the gold saw a record price peak of $2,069.40 an ounce. However, the next was another surprise as the price hit the record high of $2,089.20. The rise was not unexpected. Given the circumstances at that time, it was anticipated that this scenario would eventually show up. There were various underlying factors that contributed to this all-time high gold price. Here are a few:
Covid-19 as the major contributor to the gold rally
Till the end of 2019, when news and debates about a rumour that a dangerous virus was about to engulf the world were making the headlines, no one would have imagined that the upcoming pandemic would ultimately shake the global economy so badly. The events of the year 2020 however caused every small and large economy to tremble as strict lockdowns and shutdowns of businesses took place. The air of uncertainty only hyped as employees were retrenched and businesses fell. Amidst these, the investors were also afraid of the uncertainty in the financial market and decided to resort to the ultimate safe haven – gold! The economic uncertainty and resulting decisions to invest in a more stable asset led to last year’s hypes.
Gold and treasury yields
Also, the significant monetary easing (QE) in response to the tensions brought by covid further intensified issues. It resulted in lower yields on long term treasury bonds that led to investors losing confidence. Usually, a long term bond such as the US 30-year Treasury bond yields an average of around 3% per year owing to the risk associated with this long-term debt. However, the monetary easing led to the ultimately disturbing and unappealing low-interest rates. The latter further pushed the investors already sitting on the fence to plunge into the gold markets.
US rising tensions with Russia, China, and Iran
Lately, the US has not been best friends with quite a number of countries. Currently, the relationship between the US and Russia is not a happy one. While both try their best not to explicitly take any negative steps against the other, the tensions, however, can be felt in the frequent allegations and cyberattacks they blame on each other.
To make matters worse, China and the US have very openly expressed hatred towards each other. There has been a lot of lobbying, trade restrictions, and sanctions placed on each other in the preceding few years. And let us not forget the recent US-Iran confrontations. These recent geographical instabilities, uncertainties, and potential for conflict also hampered investor trust and led to high demand for gold. The latter, in turn, led to high gold prices.
Lower treasury yields, as explained, led to a distrust and diminishing demand for the greenback. Moreover, the people who preferred investing in dollars rather than gold due to its worldwide strength also lost hope and switched to gold during the pandemic and geographical tensions. These did not only hurt the dollar and the US economy but ultimately also resulted in an upsurge in gold and a rise in its price,
Increase in jewellery and industrial demands
Well, enough of the devaluations and demotivation. Let’s take a look at the ‘brighter’ reasons that led to the gold rally. There was a time people wanted to let go of the traditional heavy gold-made jewellery and opt for the lighter artificial one. But as we mentioned earlier, people find it hard to let go of it. While the Indian race has always kept this yellow treasure close to their hearts, demands for gold-made jewellery in China and the US are also picking pace.
Apart from this, the metal’s chemical properties and the edges it has over other metals ahs recently increased its industrial demands. Currently, the healthcare industry prefers it for the creation of stents, while it is also a great electricity conductor. The spike in these industries also played a role in the current gold price hype.
Lower gold production
On the same note, people must understand that while gold can be recycled, it is not a renewable resource. Hence, once it is depleted, there is no way the gold mining industry can meet the rising demands. The lack of supply ultimately increases the price.
Recently, experts noted that the so-called ‘easy to mine’ gold sites had been exhausted, and now people have to ‘dig deeper to get it. Therefore, there is a delay in meeting the cresting demands, which led to the phenomena at hand.
Increasing Gold reserves
One thing that has not gone unnoticed in the past few years is most countries’ attempts to de-dollarize their reserves. While having reserves in the form of dollars was an excellent strategy against the devaluation of local currencies, central banks are now moving towards gold reserves, perhaps owing to the rising tensions between the US and the other countries. The more central banks lean towards buying gold for their reserves, the higher the prices will rise.
As apparent from the discussion above, it has been all about the game of demand and supply. Yes, some factors such as the pandemic and the deteriorating American economy pushed it far this time. The ultimate answer is if demand rises, prices will increase. Supply has an effect, but a minimal one as gold’s supply can not be increased suddenly(inelastic supply), and this is why a slight upward shift in demand leads to an exponential price peak. After all, there is a reason why the metal is called ‘rare’.
Gold and cryptocurrencies
When speaking of gold, an important technological advancement we must keep in our minds is cryptocurrency. The introduction of virtual money gave birth to a new and presumably safer alternative to the traditional ways of investment. While many initially thought the advancement was too unreliable and would not last long, cryptocurrencies such as Bitcoin have earned the same stability and reputation as gold. It has an excellent store value and performs well during both inflationary and deflation periods.
To an extent, this has shifted the investment into gold in the past decade. However, experts also believe that Bitcoin is actually enjoying the first-mover benefits. So far, bitcoin is compared to gold due to its scarcity, but once other cryptocurrencies pick pace and bitcoin become common, it is highly likely that the currency will lose value. Resultantly, people might turn back to their faithful companion, gold, once again.
What does the future hold?
The question is, where are we going to see gold prices in the future. Given the uncertainty of events and the tense geographical air, it is hard to tell. Yes, predictions have been made, but experts have completely varying views. Here are a few:
- Covid vaccine settles matters a bit.
Covid was undoubtedly the main driver behind the peaking gold prices. However, the introduction of the vaccines stabilized matters. The drop in gold prices in 2021 proves this point. However, the unequal distribution of the virus and the rise of the Delta Variant might steer things the opposite way.
- People have absorbed the effects of the monetary policies
Experts believe that Fed has done a great job in adjusting the interest rate, and people have absorbed the earlier shocks of QE that led to lower yields. Due to the more stable and rewarding. Hence, the gold prices may drop in 2022.
- But inflation will stay for a while
While many experts believe that the current inflation is transitionary, others are sure it is here to stay for quite a while. If inflation stays, the devaluation of fiat currencies will lead to increased gold prices. However, if inflations tones down, we might see a drop in the prices.
The increase in gold prices last year was not something surprising. The underlying situations had been suggesting the upcoming hype for a while. Nevertheless, it is true that Covid pushed matters a bit too far too early. However, if the world recovers from the traumatizing pandemic and its effects on the global economy, the gold rally may lose speed in the forthcoming year.
Keith Dunn is a regular contributor at kredilife.com for technology and business niche articles. He is a retired IT Professional with technical expertise in Linux Server Administration. He also worked at the IT Startup he founded (LinuxHeads Inc. ) and has expansive knowledge about SME’s adn Start-ups.