April 15, 2020

Coronavirus and Market Volatility: What’s Next for Gold Prices?

Coronavirus and Market Volatility: What’s Next for Gold Prices?

After seeing some wild daily swings in March, could the economic instability inflicted by the coronavirus pandemic be setting up gold prices to break out to new highs in April?

Gold prices gained in volatile trading this week amid weakening appetite for risk as rising deaths dampened hopes for a swift containment of the coronavirus.

Since the beginning of the coronavirus stock market downturn, investor demand for safe havens has steadily lifted the price of gold to new yearly highs of $1,687.80.

As the volatility in gold prices continues, Goldman Sachs, the multinational investment bank and financial services company, says now is the time to buy gold amid the still unfolding impact of the coronavirus pandemic.  However, no one can predict the future in these unprecedented times.

Why are gold prices rising?

Gold, known as ‘the’ safe haven asset, historically becomes more valuable during times of geopolitical turmoil, in return, safeguarding investors in the event of instability.

The reason? In times of crisis, investors are more prone to rush their investments from riskier assets to havens, both as an effective portfolio diversifier and also in an attempt to hedge against anticipated market declines or market crashes. However, who knows whether gold will be a safe haven during this crisis, only time will tell.

The correlation between gold and the stock market

While gold commonly enjoys an inverse relationship with the dollar, stocks markets also have a deep connection to the yellow metal. 

The frequent inverse relationship between gold and stocks manifested itself once again during March 9, when the market endured its biggest drop since September 29, 2008 as gold gained, and on March 10, when stocks soared and gold retreated.

This makes sense when you think about it. Stocks benefit from economic growth and stability, while gold benefits from economic distress and crisis. If the stock market falls, fear is usually high, and investors typically seek out alternative safe haven assets.

In times of bullish stock markets, the perceived need for gold from mainstream investors is low. Obviously, this doesn’t mean gold is sure to rise with every downtick in the stock market, as anything can happen when markets are hit with extraordinary volatility.

What should investors look for in the longer term?

The extreme spread of the virus has lowered expectations of economic growth in China, the U.S. and in many other countries. In a bid to support economies hammered by the outbreak, governments and central banks around the world have unleashed unprecedented fiscal and monetary stimulus. Liquidity in markets is often bullish for gold.

In addition, there are signs that inflation is increasing in China as reflected in the jump in Chinese consumer prices. Inflation is also normally positive for gold.

But that’s not all. Gains for the precious metal are also likely supported by fears the measures being implemented to prevent the spread of the deadly infection will result in a global recession – further strengthening the bullish case for gold. Nevertheless, the global economy may bounce back quicker than expected and may result in gold losing its gains. 

In conclusion 

Many analysts believe that gold prices are expected to continue rising the more the virus spread intensifies, in tandem with lockdown efforts to mitigate it. Of course, the effect can reverse just as fast in the event that the global pandemic begins showing signs of stabilising as confirmed cases and deaths begin to decline.

The long-term picture is currently viewed as bullish, and while any pullbacks could be considered as a potentially good buying opportunity, investors should remember that in the short term the market will take cues from every bit of news that pops up.

That said, gold may be a hedge for investors as the market focus returns to the U.S. presidential election, and the market sees no definite timeframe for the end of the coronavirus epidemic.

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