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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

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.

COVID-19 Economy FAQs

So what’s up with “Zoom fatigue”?

It’s a real thing. The science backs it up — there’s new research from Stanford University. So why is it that the technology can be so draining? Jeremy Bailenson with Stanford’s Virtual Human Interaction Lab puts it this way: “It’s like being in an elevator where everyone in the elevator stopped and looked right at us for the entire elevator ride at close-up.” Bailenson said turning off self-view and shrinking down the video window can make interactions feel more natural and less emotionally taxing.

How are Americans spending their money these days?

Economists are predicting that pent-up demand for certain goods and services is going to burst out all over as more people get vaccinated. A lot of people had to drastically change their spending in the pandemic because they lost jobs or had their hours cut. But at the same time, most consumers “are still feeling secure or optimistic about their finances,” according to Candace Corlett, president of WSL Strategic Retail, which regularly surveys shoppers. A lot of people enjoy browsing in stores, especially after months of forced online shopping. And another area expecting a post-pandemic boost: travel.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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