Gold
Traditionally, the stock market and the price of gold are thought to be inversely correlated. If one grows, the other falls. There is a logical explanation for this: when a crisis looms, investors turn to protective assets, one of which is gold.
In March 2020, the price of gold went down with the S&P 500, and then in April they went up together. Why?
Turns out the threat of a debt crisis is forcing everything, including precious metals, to fall. When states cannot repay debts, their central banks can begin to sell gold reserves. The covid-19 crisis has become global and threatening to many of the world’s economies, so when it came, many were frightened. In addition, gold is not only a means of accumulation, it is also a commodity for which demand may fall.
Thanks to recent events, we are again convinced that the dollar is the most reliable asset in a panic situation. However, the gold showed itself in the best possible way when it became clear what was going on.
Gold is rising in value:
- when central bank rates fall, and hence yields on bank deposits and bonds;
- in times of political and social instability;
- in times of fear of inflation (although the price of gold is not directly correlated with inflation), so this includes any fears. Gold calms people down from time immemorial, and our time is no exception. There is a theory that public anxiety is increasing over the years, which is also good for yellow metal.
Gold demand is generated by four major industries: jewellery, investment, central bank reserves and high technology. Interestingly, about 6-10% of gold is used in electronics, computers, and spacecraft. So far, demand is the least there is, but as we approach the bright future, it will grow.
In 2020, the demand picture shows that most gold was bought by investors, followed by lovers of jewellery (previously in first place), then central banks and then the makers of the machinery. So right now, gold prices are determined by investors.
There are a number of ways to invest in gold:
- purchase of real bullion (hard and expensive, sales tax will have to be paid);
- through the shares of gold mining companies (biased, because if a company does not work well, rising metal prices will not help it, but more speculative, so stocks rise faster);
- through the funds (the service commission has to be supervised).
The largest gold holders are funds such as SPDR Gold (GLD) and Ishares Gold Trust (IAU), which are traded on the exchange. They’re tied to gold prices.
Gold prices began to soar in June 2019 against the backdrop of the US-China Trade War: from $1,305 per ounce, the price rose to $1,670 (+28%) in March 2020. Minimum March crash due to COVID-19 -$1477 (-13%). August maximum $2070 (+40%), and September minimum $1847. And here’s the gold going up again. It’s a good time to come in.
Why else would gold go up in value:
- COVID-19 crisis continues, fears are still growing;
- The Congress may adopt a new aid package;
- Uncertainty in presidential elections;
- Demand for high-tech gold is growing (next 10-20 years).
Why can gold temporarily drop in value:
- Stabilization of the world situation;
- Successful introduction of COVID-19 vaccine;
- Sharp increase and simplification of gold mining;
- Debt crises of States.
Conclusion:
Keeping in the form of ETF or shares of gold mining companies is worth, but not more than 10% of the portfolio and only as a stable long term.