Gold shatters USD2,000 record price

Gold bars

Gold has made it through the USD2,000 per troy ounce level for the first time ever, following a 32 per cent rally this year in the precious metal.

Gold’s strength comes on the back of uncertainty driven by the Covid-19 pandemic and its economic knock-on effects. According to World Gold Council figures, much of the investment in gold has come through ETFs, with investors buying USD7.4 billion of gold-backed ETFs over July alone, adding to the USD40 billion that has already flowed in over the year so far.

Commenting on the news, Hector McNeil of HANetf, which launched the Royal Mint’s gold ETF (RMAU) earlier this year, says: “Gold moving over USD2k an oz is big news. Given the uncertain times economically and politically its clear gold is doing its job as an insurance asset. BAML and many other analysts are predicting USD3k and it doesn't seem far off given the real economic friction is still to come once the true impact Corona has had on the World’s economy is truly known.”

RMAU’s assets reached USD350 million this week, since listing in February.

“This truly shows investors not only want the safe haven of gold but also want to have the surety it's held in custody with a custodian with unparalleled history and that sits outside the financial system as opposed to a bank vault," McNeil says.

Storage of gold is quite the issue, with The Financial Times reporting that HSBC vaults, somewhere in London, now hold SPDR Gold Shares’s physical gold assets. GLD, a partnership between the World Gold Council and State Street has assets of USD80 billion, representing 1,258 tonnes of gold, equal to a quarter of all the gold held at Fort Knox in the US, more than the gold reserves of the Bank of Japan, the Bank of England or the Reserve Bank of India, and close to China’s 1,948 tonnes of the precious metal.

Commenting on the record price, the LBMA says: “The London Gold Price hit an all time record high at USD2,034.45 at the 10:30 a.m. auction, today. This is the first time in its 100-plus year history that the London price of gold has exceeded USD2,000 per troy ounce.

“The new record price continues gold’s rapid rise through 2020. The metal price opened the year on 2 January at USD1,520.55 and has gained 33.8 per cent in the 149 trading days to date, breaching USD1,900, for the first time on 24 July.  Previous milestones were passed on 14 March 2008 (USD1,000) and 20 April 2011 (USD1,500).  In all, the price of gold has risen some 621 per cent, in the 20 years of this century.”

“I can think of no clearer demonstration of gold’s role as a store of value than the enthusiasm with which investors across the world have turned to the metal during the unique social and economic turmoil of the past few months,” says Ruth Crowell, CEO, LBMA. “Gold has once again proved to be the safe-haven of choice in periods of uncertainty and high volatility.” 

Giles Coghlan, Chief Currency Analyst at HYCM comments that gold is a go-to investment in times of uncertainty.

“The reason for this is simple – gold is a safe haven asset that is able to maintain, and indeed increase, its value during volatile periods.   

“To me, 2020 will be known as the year of the gold rush. Its spot price has increased by 32 per cent since the beginning of the year and finally broken USD2,000. This an astounding performance, and naturally has people questioning just how high the price of gold will go. Momentum and confidence are high, and I get the impression that people are keen to see how high the price of gold can go.”

Coghlan comments that the key difference between today’s scenario and other economic downturns has to do with the fact this market crisis is a result of a health pandemic – something investors cannot control. However, the same principles of investing in gold still apply.  

“Investors and wealth managers have been buying up gold due to their concerns over the global economy’s ability to effectively recover from the COVID-19 pandemic. The fact that private banks are encouraging their clients to buy gold as a means of hedging against inflation and currency fluctuations shows that the market is not confident that we have witnessed the end of the coronavirus outbreak. 

“Stock markets may be making modest daily gains but the chance of a second outbreak of cases, which seems to be increasingly likely, could result in these gains being lost. What’s more, we shouldn’t forget that there are some big-ticket events on the table for the rest of 2020, including the US Presidential election, Brexit and the ongoing US-China trade war. These will all have significant implications on the financial markets depending on how they play out. As a result, investors are taking a conservative approach by reducing their risk exposure.   

“In general, gold has proven to be the place for investors to gain during the last three major recessionary periods. In the 1990/91 recession, the 2001 recession, and the 2007/09 GFC, gold has increased in value during these periods of economic downturns.”

However, Coghlan is cautious as to whether now is the right time to buy gold.

“It’s a difficult question with no clear answer. Gold is an important tool for investors; however, it needs to be properly managed. Simply buying and holding gold for long-term returns is the wrong approach to take. Rather, the precious metal is more suited for short- and medium-term purposes and requires the investor to keep a keen eye on the market to know when it is best to sell.  

“However, what I recommend using is the Volatility Index (VIX). By analysing future risk and investor behaviour, the VIX provides a 30-day projection of the expected volatility likely to be experienced by the major markets.  

“Based on performances in the past, a drop in the VIX should be followed by a rise in gold prices and vice versa. As such, investors considering gold purchases should watch the performance of the VIX."

Most analysts predict that gold will stay on its upward path, but within a USD2,300 top figure, but Bank of America’s analysts Michael Jalonen and Lawson Winder have gone further. "The size of major central bank balance sheets has been stable at 21 to 28 per cent of GDP in the past decade just like the gold price," Jalonen and Winder write.

"As central banks and governments double their balance sheets and fiscal deficits, we up our 18m gold target from USD2000 to USD3000/oz."

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Beverly Chandler
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