By David Brough
Gold prices hit a more than seven-year high in mid-May, buoyed by deteriorating relations between the United States and China, aggravating worries over the global economic outlook due to the coronavirus pandemic.
Gold prices appear poised to rise further if Sino-U.S. ties continue to worsen, with President Donald Trump saying he could cut ties with Beijing, and will be supported by expectations of additional central bank stimulus measures.
Gold was at $1,743.12 per ounce, up 0.42 percent, late on May 15, having earlier touched $1,751.25, its highest since November 2012. Bullion was up more than 2 percent in the week to May 16.
Expectations of dismal economic data from around the world in the second quarter have raised prospects for further central bank stimulus, which is generally seen as buoying bullion.
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 investor flows 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 exchange-traded funds (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 bullion may be an even better bet, but this has security implications for the smaller investor in particular.”
The current climate of rock bottom interest rates in leading economies is supportive for gold which bears no yield.
Expectations for further central bank stimulus will underpin gold which is seen as a hedge against inflation and currency debasement.
For UK jewellers and jewellery manufacturers, a softening pound will increase costs of restocking dollar-denominated gold.
The pound hit its lowest in more than a month on May 15 after new obstacles arose in trade talks between the UK and EU.
Sterling is also suffering from the debilitating impact of the coronavirus pandemic on the British economy, and expectations for more Bank of England stimulus, such as quantitative easing.
Sterling-based gold savers may see holding gold as a way to protect themselves against the soft currency.
The pound 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; and the UK’s refusal to extend the Brexit transition period.
Disclaimer: Any opinions expressed in this article are solely those of the author and should not be seen as investment advice.