Fears of a second wave of coronavirus, stoked by Beijing’s crackdown after a surge in cases, are supporting gold.
Gold prices held above $1,700 an ounce in mid-June, underpinned by news of the cluster of new cases around a food market in the Chinese capital.
The number of cases of the novel coronavirus has also continued to rise in the United States, buoying gold.
Gold is regarded as a “safe haven” in times of geopolitical turmoil.
The yellow metal was down 0.61 percent to $1,718.82 per ounce on June 15, pressured by a firming U.S. dollar.
If fears of a second wave of coronavirus are realised, and economies start to shut again, investors could seek a flight to safety in gold and drive bullion prices higher, several analysts say.
However, if Chinese authorities succeed in rapidly suppressing the outbreak in Beijing, and economies around the world make steady progress in reopening, safe-haven demand for gold will likely weaken.
Another key focus for the gold market will be the levels of fresh central bank stimulus pumped into economies, and the momentum of investor flows into gold-backed exchange traded funds (ETFs), which has been strong lately.
Gold prices jumped last week on renewed pessimism about the U.S. economic outlook, coinciding with a tumble of U.S. equities on June 11 as negative sentiment dug in due to the increasing cases of Covid-19 in the world’s largest economy.
“The equities crash of (June 11) may just be the start of a stock prices collapse which could continue, on and off, for several months and likely drive investors seeking safety into gold and silver,” wrote Lawrie Williams, precious metals commentator for bullion dealer Sharps Pixley.
Capital Economics has predicted a gold price of $1,600 per ounce by the end of 2020, as fears of a spike in inflation as a result of central bank stimulus are seen as exaggerated in the short to medium term.
“Despite fears of runaway prices, we think that stimulus-fuelled inflation is unlikely in the short or medium term. With interest rates set to remain historically low, we expect the gold price will come under pressure from fading safe-haven demand, falling to $1,600 per ounce by year-end,” it said.
For UK-based gold savers, the slippage of the pound to two-week lows on June 15, boosted the return on their dollar-denominated gold holdings.
Gold prices last week nudged up almost to their highest level in more than 7-1/2 years in dollar terms, before slipping back.
The pound weakened against the dollar on June 15 due to the worries over a second wave of coronavirus, which triggered safe-haven buying of the greenback.
A lack of progress in Brexit trade talks has also weighed on the pound.
Frequently asked questions
How is the threat of a second wave of coronavirus affecting gold prices?
Fears of a second wave of coronavirus are providing strong support for gold, keeping prices stable above $1,700 an ounce in mid-June. This stability was driven by a rise in Covid-19 cases in both the United States and Beijing, where a new cluster of cases emerged around a food market. When public health concerns escalate, gold is widely sought after as a “safe haven” asset. If these second-wave fears are fully realised and lead to further economic shutdowns, analyst consensus suggests that investors will continue fleeing to the safety of gold, which could push bullion prices even higher.
Conversely, if authorities can quickly suppress outbreaks and global economies make steady progress in reopening, the demand for safe-haven assets will weaken, potentially dragging gold prices down. Overall, the market is closely watching these health trends alongside central bank stimulus and inflows into gold-backed ETFs.
What impact did the June equities crash have on the gold market?
The equities crash on June 11 acted as a major catalyst for the gold market, causing prices to jump due to renewed pessimism regarding the US economic outlook. This stock market plunge coincided with rising Covid-19 cases in the US, which heavily damaged investor sentiment. According to industry commentators, such as Lawrie Williams of bullion dealer Sharps Pixley, this crash might mark the beginning of a stock price collapse that could persist on and off for several months.
As stock prices remain volatile and potentially continue to collapse, investors looking to protect their wealth are expected to seek safety. This flight from volatile equities is highly likely to drive investors toward purchasing precious metals, specifically gold and silver, as secure alternatives to equities during prolonged periods of market instability and economic downturns.
Are gold prices expected to fall by the end of 2020?
Yes, Capital Economics has predicted that gold prices will fall to $1,600 per ounce by the end of 2020. This forecast is based on the belief that the safe-haven demand that previously drove gold prices higher will begin to fade as global economies continue to make progress in reopening. While many investors fear that massive central bank stimulus will spark runaway inflation, which typically supports gold, Capital Economics views these inflation fears as exaggerated in the short to medium term.
With interest rates expected to remain at historically low levels, the gold price is likely to face downward pressure as the urgency for safe-haven assets diminishes. Although gold prices reached near 7.5-year highs in mid-2020, this projection suggests a steady correction towards the $1,600 level as market conditions stabilise.
How has the performance of the British pound affected UK gold savers?
The slippage of the British pound has actually boosted returns for UK-based gold savers holding dollar-denominated gold assets. On June 15, the pound fell to a two-week low against the US dollar. Because gold is priced internationally in US dollars, a weaker pound means that the relative value of those gold holdings increases when converted back into sterling, providing a financial cushion for UK savers during the currency downturn.
This weakness in the pound was triggered by two main factors. First, global worries over a second wave of coronavirus prompted investors to buy the US dollar as a safe-haven currency, strengthening the greenback against the pound. Second, a distinct lack of progress in Brexit trade negotiations further weighed on the British currency, compounding its decline and indirectly benefiting UK gold savers.
What role does the US dollar play in the current gold price fluctuations?
The US dollar plays a critical role in gold price movements, often acting as a competing safe-haven asset. For instance, on June 15, gold prices fell by 0.61 percent to $1,718.82 per ounce because they were pressured by a strengthening US dollar. When investors grow concerned about global events, such as a second wave of coronavirus, they often buy the US dollar to protect their capital, which can temporarily reduce the demand for gold.
Because gold is denominated in US dollars, a stronger greenback makes the metal more expensive for buyers using other currencies, which naturally dampens demand and drives prices down. The balance between investors choosing the US dollar versus gold as their preferred safe haven is a primary driver of the daily fluctuations seen in the precious metals market.
