The COVID-19 Gold Rush

11th August 2020

On 5th August 2020, the gold price per ounce topped $2,000 for the first time, going as high as $2,055 on the day and overtaking the former record high of $1,920.20 set in 2011.1 2 The price of gold has risen by 34% since the beginning of the year and by $200 two weeks prior to an ounce topping $2,000, with the World Gold Council reporting in the first half of 2020 that financial investors had added a record 734 tonnes to their portfolios worth $39.5 billion.3 4 Elsewhere, on the London Bullion Market, Chief Executive of the London Bullion Market Association, Ruth Cromwell, has reported that more gold is being traded every day than ever previously recorded, with a new record, set on 30th July, seeing 89.36 million ounces changing hands.5 This article will therefore seek to answer why the price of gold topped $2,000 and why it is one of the most favoured assets to acquire during the COVID-19 pandemic.

To an extent, the rising cost of gold is a self-fulfilling prophecy as the increased popularity of gold presents opportunity and creates momentum, two of the primary drivers for gold demand as listed by Juan Carlos Artigas, the Head of Research for the World Gold Council.6 The momentum of a rising asset, as well as the perceived opportunity for people to make money from it, leads to the price continuing to rise which in turn creates a shortage due to people hoarding gold and therefore pushing prices higher. Despite the demand for gold in the form of jewellery having reduced by 50% to 572 tonnes in the important gold jewellery markets of China and India, gold in terms of investment has increased significantly with 922 tonnes of gold so far this year being added to investor stockpiles.7 8 In addition to this, gold prices have also been inflated by disruptions to the supply chain caused by the COVID-19 pandemic. As a result of the virus, gold mines have been forced to shut and to cease production in order to prevent its spread, therefore reducing the supply of gold.9 The gold that is produced is then subject to strict travel restrictions and oftentimes elevated exporting costs, which further raises the price of gold.10

A further primary driver of gold demand labelled by Juan Carlos Artigas is risk and uncertainty, with experts pointing to the continued worsening of US-China trade relations, as well as general political tensions as a potential source of the rising gold prices.11 Others have pointed to the economic and health crisis created by COVID-19 in major economic hubs, particularly the USA where a continued increase in new cases and the introduction of economic stimulus measures to mitigate the impacts of the pandemic has seen money flood the market and bank interest rates being ‘near net-zero rates’.12

The introduction of economic stimulus packages is one of the major reasons why gold has become a favoured form of investment with many investors fearing that the touted $20 trillion of stimulus promised by governments around the world will see currency, as well as other assets such as government bonds, lose its value through inflation.13 Its particular current popularity as a ‘safe haven’ investment is due to this volatility within the currency market with the long-term dollar investment ‘safe haven’ at a two-year low and weak against a multitude of other currencies.14  This way of thinking has been best summed up by Michael Hewson of CMC Markets who contends that ‘ultimately with gold you can’t print any more of it, you can’t artificially create it. It will hold its value’.15

The pandemic has stimulated interest in gold by creating three primary drivers of gold demand; momentum, opportunity and risk. With interest rates having been cut significantly there is no incentive to keep your money in traditional banks, whilst gold bullion provides the relative safety of stable worth in a volatile currency market. Economic mitigation measures have seen governments and individuals alike invest not only in gold but other precious metals too which, as a collective, are expected to ‘average 13% higher in 2020 relative to 2019’ due to ‘heightened global uncertainty and ultra-low real interest rates’.16 Whilst some are predicting gold to keep rising, arguably the rise is unsustainable with some fearing that the bubble could burst and see the price of gold fall back below $2,000 an ounce. However, with the long-term global economic implications of the pandemic not yet understood, the investment in precious metals known for holding their value could be a wiser move than other investment opportunities.