- Gold prices hit a more than three-week high in mid-May, buoyed by worsening tensions between the United States and China, and seem set to rise further underpinned by central bank stimulus.
- Gold was at $1,737.50 per ounce on May 15, its highest level since April 23, benefiting from its safe haven status due to rising worries over US-Chinese relations, with President Donald Trump saying he could cut ties with Beijing.
- Expectations of dire economic data from the world’s biggest economies in the second quarter have raised prospects for further central bank stimulus, which is supportive to gold.
- While central banks in the U.S. and UK have appeared to pour cold water on prospects for negative interest rates, the debate is likely to continue as the economic downturn deepens.
- Many analysts see a constructive longer-term price outlook for gold, including flights to safety in the precious metal if equity markets plunge again.
- A signal of the growing attraction of bullion has been increasing inflows into gold-backed ETFs.
- “Big money has been pouring into gold-backed ETFs at record levels over the past few months which should give us an indicator here,” wrote Lawrie Williams, the gold market commentator with bullion dealer Sharps Pixley.
- Gold tends to do better in a climate of low-interest rates as bullion bears no yield.
- Central bank stimulus underpins gold which is seen as a hedge against inflation and currency debasement.
- For UK gold savers, a softening pound will boost returns in sterling terms from holding dollar-denominated gold, particularly if gold continues to rise in the longer term as many expect.
- The pound fell to its lowest level in more than five weeks against the dollar in mid-May due to a mix of pressures: Britain’s insistence not to extend its Brexit trade deal December negotiating deadline; the crushing impact of COVID-19 on the UK economy; the likelihood of more Bank of England stimulus, such as quantitative easing; and the dollar’s appeal as a safe haven currency at a time of extreme global economic uncertainty.
- UK gold savers may see holding gold as a way to protect themselves against a weakening domestic currency, as sterling has been the worst-performing G-10 currency so far in May.
- Some analysts expect the pound to fall further, due to forecasts for the increased contraction of UK GDP; a slow exit from the lockdown in the UK compared with other countries; a lack of progress in Brexit trade talks, in part due to COVID-19; and weak investor sentiment.
Gold prices hit a more than three-week high in mid-May, buoyed by worsening tensions between the United States and China, and seem set to rise further underpinned by central bank stimulus.
Gold was at $1,737.50 per ounce on May 15, its highest level since April 23, benefiting from its safe haven status due to rising worries over US-Chinese relations, with President Donald Trump saying he could cut ties with Beijing.
Expectations of dire economic data from the world’s biggest economies in the second quarter have raised prospects for further central bank stimulus, which is supportive to gold.
While central banks in the U.S. and UK have appeared to pour cold water on prospects for negative interest rates, the debate is likely to continue as the economic downturn deepens.
Many analysts see a constructive longer-term price outlook for gold, including flights to safety in the precious metal if equity markets plunge again.
A signal of the growing attraction of bullion has been increasing inflows into gold-backed ETFs.
“Big money has been pouring into gold-backed ETFs at record levels over the past few months which should give us an indicator here,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.
Gold tends to do better in a climate of low interest rates as bullion bears no yield.
Central bank stimulus underpins gold which is seen as a hedge against inflation and currency debasement.
For UK gold savers, a softening pound will boost returns in sterling terms from holding dollar-denominated gold, particularly if gold continues to rise in the longer term as many expect.
The pound fell to its lowest level in more than five weeks against the dollar in mid-May due to a mix of pressures: Britain’s insistence not to extend its Brexit trade deal December negotiating deadline; the crushing impact of COVID-19 on the UK economy; the likelihood of more Bank of England stimulus, such as quantitative easing; and the dollar’s appeal as a safe haven currency at a time of extreme global economic uncertainty.
UK gold savers may see holding gold as a way to protect themselves against a weakening domestic currency, as sterling has been the worst performing G-10 currency so far in May.
Some analysts expect the pound to fall further, due to forecasts for increased contraction of UK GDP; a slow exit from the lockdown in the UK compared with other countries; a lack of progress in Brexit trade talks, in part due to COVID-19; and weak investor sentiment.
Frequently asked questions
Why did gold prices rise to a three-week peak in mid-May?
Gold prices surged to a three-week peak of $1,737.50 per ounce on May 15 primarily because of escalating tensions between the United States and China. Relations between the two global powers worsened significantly, with US President Donald Trump even suggesting that he could cut ties with Beijing. This political instability increased the safe-haven appeal of gold.
Additionally, expectations of dire economic data from major global economies in the second quarter fueled anticipation of more central bank stimulus, which typically supports gold. Despite central banks in the US and the UK playing down the likelihood of negative interest rates, the deepening global economic downturn continued to drive investors towards safety. Analysts also noted that if equity markets suffered another plunge, further flights to safety would likely bolster gold prices even more over the longer term.
How does central bank stimulus influence the price of gold?
Central bank stimulus acts as a significant supportive factor for gold prices because the precious metal is widely regarded as a hedge against inflation and currency debasement. When central banks inject liquidity or implement measures like quantitative easing to support struggling economies, it often raises concerns about the future value of fiat currencies, driving investors to physical assets.
Furthermore, gold tends to perform much better in an economic climate characterized by low-interest rates. Because gold is a physical commodity that bears no yield, high-interest rates can make it less attractive compared to yield-bearing assets. However, when interest rates are low and stimulus is high, the opportunity cost of holding gold decreases, making bullion an attractive alternative for safeguarding wealth during times of economic uncertainty.
What role are gold-backed ETFs playing in the current gold market?
Gold-backed exchange-traded funds (ETFs) are experiencing record-level inflows, serving as a clear indicator of the growing appeal of physical gold among major investors. Market commentators have highlighted that “big money” has been pouring into these funds at unprecedented levels over recent months, which signals strong, constructive confidence in the long-term price outlook of the precious metal.
These massive inflows demonstrate that institutional and private investors are actively seeking a reliable store of value. As global markets face high volatility and economic uncertainty, the substantial movement of capital into gold-backed ETFs indicates that market participants are positioning themselves for potential equity market downturns and ongoing currency instability, further underpinning the rising price of bullion.
Why is a weakening pound beneficial for UK gold savers?
A weakening pound benefits UK gold savers because gold is globally priced and denominated in US dollars. When the value of sterling falls against the US dollar, the return on dollar-denominated assets automatically increases when converted back into British currency. Consequently, UK savers holding gold will see their returns boosted in sterling terms, especially if the global price of gold continues its upward trajectory.
In mid-May, sterling fell to its lowest level against the dollar in over five weeks, making it the worst-performing G-10 currency during that period. For British savers, holding gold has therefore emerged as a strategic way to protect their domestic purchasing power. By converting cash into gold, they can effectively shield their wealth from the ongoing depreciation of the pound.
What factors have contributed to the recent decline of the British pound?
The British pound fell to a multi-week low in mid-May due to a combination of severe domestic and international economic pressures. A primary driver was the UK Government’s firm refusal to extend the December negotiating deadline for its Brexit trade agreement with the European Union, which renewed market anxieties about a disruptive trade transition.
Furthermore, the devastating impact of the COVID-19 pandemic on the UK economy severely dented investor sentiment. This economic shock increased the likelihood of further stimulus measures from the Bank of England, such as quantitative easing, which puts downward pressure on the currency. The situation was worsened by predictions of a sharp contraction in UK GDP, a slower exit from lockdown compared to other nations, and the global appeal of the US dollar as a safe haven.
