Gold Price Hits New Record High: Investors New Safety Destination

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Wednesday, August 05, 2020, / 07:05 PM / By Proshare Research  /  Header Image Credit: FX Empire


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Gold prices closed at a record high of $2,019/t.oz on Tuesday 4, August 2020 for the first time since September 2011. Spot gold prices have appreciated by more +33% so far in 2020 setting it on course of having its strongest price appreciation in 40 years.


Analysts note that has been an increase in investor preference for metals such as gold, silver, palladium, and platinum. The uptick in metal prices reflects investor's strategic holding of alternative assets to hedge downturns in the value of currencies previously considered to be 'safe-havens' of value.  COVID-19 and the tumbling returns on equities and fixed income assets have nudged investors to reconsider their options, and the major beneficiaries of the new investor outlook appear to be gold and other metals (see Chart 1).


Investors fleeing to Gold believe it would provide the necessary stability to their portfolios and insulate their assets from coronavirus-induced global market uncertainty. Some investors have opted for silver, in the hope that when a global economic recovery, possibly in 2021, is triggered an increase in factory activity would propel an increase in the demand for silver used in industrial factories.


Chart 1: Gold Price January 2020 - August 4th, 2020

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Source: Bloomberg, Proshare Research


The fall in the American 10-year bond yields which is currently at a record low has led to the shift of focus to other assets class. Given the paucity and limitations of assets class for investment, investors are tilting towards metals such as gold and silver with what appears to be higher returns and stability (see Chart 2).

 

Chart 2: United States 10-Year Bond Yield

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Source: Trading Economics, Proshare Research


Accommodative monetary policy coupled with increased government spending has weakened the dollar against other currencies thereby strengthening the demand for gold. The fall in the value of the dollars has made gold relatively cheaper in other currencies which have fuelled the increase in gold demand. The year-to-date (YTD) value of gold increased by +33.08% while it recorded a week-to-date increase of +3.10% (Table 1).


Table 1: Changes in Gold Price

Commodity

28-Jul-20

04-Aug-20

31-Dec-19

Weekly Chg

YTD Chg

Gold

1,958.43

2,019.21

1,517.27

+3.10%

+33.08%

Silver

24.40

26.01

17.85

+6.57%

+45.69%

Source: Bloomberg, Proshare Research


There has also been a large rise in the demand for silver. The year-to-date and week-to-date value of silver outweighed increases in the price of gold. Silver recorded a year-to-date and a week-to-date increase in its value of +45.69% and +6.57% respectively (see Table 1 & Chart 3).

 

Chart 2: Silver Price January 2020 - August 4th, 2020

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Source: Bloomberg, Proshare Research


The gradual resumption of production and economic activities has fuelled the demand for silver which serves as an important input for industrial production. The use of silver span across various fields as it also used in the medical field to serve as an antibiotic coating on medical service as well as the telecommunications sector in which its composition is used for the building of the 5G network.


An Eye On Tomorrow

Investors are increasingly taking different asset positions based on their forecast of the global economic outlook, it is uncertain that upward arc in metal prices will continue as global capital markets are still edgy. If the US treasury bill yield continues to decline, and the value of the dollar weakens relative to other currencies the price of gold might continue to rise. On the other hand, if the dollar strengthens gradually, consumer and investor confidence in the American economy would be restored and the gold market may likely see a trend reversal.


Consequently, if the prospective second wave of coronavirus hits and there is a decline in global factory production there would be an increase in the demand and price of precious metals like gold,  silver, palladium, and platinum. However, if a vaccine for the virus is found and factories resume activities t a fast-pace then investors would expect a significant rise in the demand and price of silver.


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