COVID-19

Why we see gold prices jump during times of uncertainty

Alex Schroeder Feb 24, 2020
Once upon a time, gold was the currency of the United States. Mario Tama/Getty Images
COVID-19

Why we see gold prices jump during times of uncertainty

Alex Schroeder Feb 24, 2020
Once upon a time, gold was the currency of the United States. Mario Tama/Getty Images

2020 has been a great year for gold, and the most recent round of coronavirus outbreak news stands to push prices for the commodity even higher.

Efforts to contain the disease have so far proven unsuccessful, as the number of confirmed cases both within and beyond Chinese borders continue to escalate:

  • South Korea: 833 confirmed cases of novel coronavirus, seven of which resulted in deaths
  • Iran: 43 confirmed cases, at least 785 people with coronavirus-like symptoms under examination and 12 coronavirus-related deaths.
  • Italy: 10 towns in the northern region of the country locked down after nearly 150 people tested positive for the disease and two died

This all spells uncertainty for the global economy. South Korea and Italy both saw stock markets dip about 4% Monday, and Asian currencies and the price of crude oil have also fallen. The Dow Jones Industrial Average opened down 3.4%, sliding more than 900 points.

At the same time, spot gold climbed 2% to $1,675.76 per ounce after hitting $1,688.66, its highest level since January 2013. U.S. gold futures were up 1.7% to $1,676.40.

So what is it about times of economic uncertainty that drive up the price of gold?

Let’s break it down: essentially, gold has long been considered a safe-haven investment. “Safe havens are sought by investors to limit their exposure to losses in the event of market downturns,” Investopedia explains. Of course, fluctuations — both negative and positive — in markets occur frequently for short periods of time. It’s during expected extended plunges that we see a shift to gold.

With no end to the coronavirus outbreak currently in sight, investors are getting increasingly concerned that we could be in for a prolonged downturn on a global scale. MarketWatch noted a recent research note from Goldman Sachs, which predicted that gold prices could top $1,850 an ounce if the disease can’t be contained by the second quarter.

So, investors move their money from volatile holdings like stocks to safe havens like gold. And that flocking drives up the price.

“When an adverse event occurs that lingers for a while, investors tend to pile their funds into gold, which drives up its price due to increased demand,” Investopedia continues.

Not every investor flocks to gold, however.

“That’s a very old-school safe haven,” Julia Coronado, founder of MacroPolicy Perspectives, told Marketplace’s Sabri Ben-Achour. “There’s this notion that gold has some kind of […] intrinsic value, which it does not. It really is a metal. It is a safe haven, though, in the minds of many, particularly old investors. And the younger investors prefer Bitcoin.”

Whether it’s cryptocurrency or metal, though, those seeking these investments have something in common, Coronado said.

“Bitcoin and gold tend to be where people who don’t trust sovereign currencies go,” she said. “If you kind of have this view that governments are all corrupt and problematic, and that ultimately somebody is going to destroy the dollar or the yen, then you’re looking for something that is independent of these sovereign currencies.”

Still, gold was already off to a strong start this year because there have been other threats to global economic growth outside of the coronavirus outbreak. For example, gold prices rallied to a seven-year high following the U.S. killing of top Iranian military commander Qasem Soleimani, CNBC reported in January.

Additionally, interest rates and inflation play a big part in the price of gold. Rates and the price of gold tend to be inversely correlated, because rising interest rates make stocks, government bonds and other investments more attractive to investors. The Federal Reserve appears to be closer to cutting interest rates rather than raising them in the near future, which bodes well for gold.

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