By the first week of August gold reached an all-time high of $2,059 per ounce.
While increases like this can arise from a number of circumstances, it seems reasonable that a pervasive sense of uncertainty is one of the biggest contributing factors. Consider that this run-up is happening at a time when consumer demand for gold has fallen sharply. Jewelry sales fell by approximately 46% in the first six months of 2020.
Gold investors have enjoyed this recent boom. Yet, the surge in prices is so strong that many have questioned where prices go from here. Answering this question means understanding how the most influencing factors will unfold in the coming months. These factors include:
- The Strength of the US Dollar
- The Pandemic
- Economic Policies
The Strength of the US Dollar
Gold is priced in USD. Therefore, when the value of the dollar diminishes an individual needs more dollars to acquire the same amount of gold. This concept also applies when the USD is strong and the price of gold decreases because fewer dollars are needed to purchase the metal. Since mid-May of this year the value of the USD has fallen considerably. This drop is likely one reason why gold has climbed in value. The important question is this: what will happen to the USD in the future? This, of course, is a question that no one can answer definitively. However, analysts at Goldman Sachs believe this “decline in the USD is just the beginning of a larger structural downtrend in the greenback driven, in part, by a further recovery in the global economy.” These same analysts are forecasting a 20% drop in the value of the USD from the recent peak reached at the end of the first quarter of this year.
Uncertainty is also driving the value of gold. The connection between uncertainty and gold prices has been studied and findings published in The Journal of Quantitative Finance determined that “economic policy uncertainty is positively correlated with gold price.” This finding begs the question: where does US economic policy uncertainty stand today? The answer can be found in the US Economic Policy Uncertainty Index which was at the highest point ever recorded as recently as June of 2020. The index ties together an analysis of media coverage of the economy, the anticipated retirement of tax code provisions, and disagreement among economic forecasters. This sentiment echoes the sobering words of U.S. Federal Reserve Chair Jerome Powell who warned that the current environment is “extraordinarily uncertain.” A return to “normalcy” is unlikely to take shape anytime soon. While uncomfortable in many respects, this setting should be supportive for current and future gold prices.
The future of economic policy in the US also remains murky. We are less than 100 days from the presidential election and, until we see the outcome, we know little about the plan for the country. This has left many investors ambivalent about the equities market and has perhaps been a reason for the heightened volatility we are seeing today. In this setting, long-term stores of value, like gold, are attractive because they give people a place to preserve wealth with a reasonable degree of certainty. No matter who becomes president it is nearly assured that a full recovery from the devastation of the ongoing pandemic is a long way away.
These three factors should remain top of mind for gold investors seeking to understand if the recent historic increase in value can be sustained. An examination of USD strength, the pandemic, and unsettled economic policy seem to indicate that current gold prices will likely remain, or even climb in the coming months.