Gold rush is not all that it seams

Crisis pushes up price of precious metal by 30%

Gold isn’t just something we like to wear, it’s also a commodity that’s traded by investors – and it’s in big demand.

The price of an ounce of gold recently topped $2,000, surpassing the previous high seen in the summer of 2011 after the financial crisis. In 2020 alone, the price of gold is up over 30 per cent at the time of writing – following a gain of nearly 18 per cent in 2019. Those are significant returns.

But why? What is causing the rise in the price of gold?

Global interest rates are extremely low

When banks and stock markets offer poor returns, investors turn to gold as a “safe haven”. Interest rates are so low – negative in some countries – that returns are next to nothing in a bank, and yields on government bonds, a comm common low-risk bet, are also poor.

It’s

less volatile

Gold offers a degree of certainty in a very u uncertain world. When markets (or politics) are up and down, people rush to physical assets like gold to reduce exposure to volatility.

It has an enduring, dependable value, hence its reputation as a safe place to put cash.

A weak dollar makes gold more valuable

Gold is traded and valued in US dollars, which means its price varies according to the strength of the currency.

When the dollar is weak, you can get more gold for your money – and the dollar has been falling in recent times as the US struggle with the impact of coronavirus continues.

Inflation concerns inflate gold prices

Inflation is currently very low, but worries of rising inflation to come are widespread after all the money pumped into economies globally.

There are clear trends when it comes to the relationship between gold and inflation, with gold returns three per cent higher, on average, when inflation goes above three per cent, a long-term US study found.

Supply and demand

Gold supply is limited: production levels haven’t increased significantly since 2016 because most “easily mined” gold has now been dug. Meanwhile consumer demand continues to grow, from jewellery to GPS components; and exchange traded funds (that anyone can buy into and trade like shares) have opened up gold investment to the masses, increasing demand.

When stock markets offer poor returns, investors turn to gold as a “safe haven”

Should you buy it?

Some experts predict more steep price rises in the next few years. But nobody can predict what will happen next in the world – as this year continues to prove.

We don’t know when inflation or interest rates will rise, what will happen to the dollar or whether the markets will stay volatile so whether you choose to invest depends on your opinion of these trends continuing.

But one thing’s for sure – our fascination with this precious metal is here to stay.