For the last two years, the world encountered an unprecedented shock. The uncompromising coronavirus altered most countries’ economies and affected nearly every industry, changing the way we conduct business and live our lives.
Against this backdrop, these past couple years have been a rollercoaster for price of gold. Triggered by governments’ and economies’ attempt at regaining what was lost, gold hit a record high price of $2,067.15 in August of 2020. Investors played their part by flocking to the yellow metal as a safe-haven investment during the economic standstill.
Expansionary monetary and accommodative fiscal policies were created by Central Banks, speeding up the current that flows money to this asset class. However in the first half of 2021, gold dropped by 6.6%, as gains during most of Q2 were thwarted by significant pullback in June. Gold’s performance in 2021 was driven primarily by higher interest rates – especially because of a more hawkish-than-expected statement by the US Federal Reserve. Gold was also influenced by upbeat investor sentiment as the global economy started to recover from the bludgeon of COVID-19.
Clearly there is a correlation between various macroeconomic factors and the price of gold. But in what way exactly do these factors drive the price of gold? To better understand the dynamics between gold and these macroeconomic factors:
- economic uncertainty
- interest rate decisions
- economic growth
- strength of the U.S. dollar
let’s dive deeper into what these factors are and how they relate to gold’s vacillating value.
During events of economic uncertainty, many invest in gold because of its enduring value, its ability to act as a hedge against market chaos such as
- currency devaluations
- political instability
Gold can act as a “safe haven” for investors in unstable arenas because its price can increase while expected returns on bonds, equities, and/or real estate may implode. The world witnessed this happen during COVID-19 when many investors demanded physical gold bars and coins to cater to their economic concerns, which pushed prices higher. Economists and investors alike took note as the virus amplified the inverse relationship gold shares with the U.S. financial system and its almighty dollar.
Value of the US Dollar
Gold prices rose not only because of the pandemic’s (temporary or permanent) closure of many American businesses, but also because of the government’s role as savior. The Federal Reserve’s dire printing efforts to supply stimulus checks and coronavirus relief packages weakened the U.S. dollar, which contributed to the rise in gold prices. Most dollar denominated metals, gold included, are inversely related to the U.S. dollar.
The U.S. dollar is powerful only because there is an entire planet full of competing currencies, a power gold capitalizes on. When the dollar rises in value, it makes gold more expensive for foreign buyers and could potentially cause declines in gold price. On the other hand, a weaker dollar may potentially make gold relatively less expensive for foreign investors, and can potentially cause spot gold prices to rise.
Monetary and Fiscal Policy
Intertwined into the value of the dollar is the (current and expected) path of monetary policy and U.S. interest rates. While no one governing body controls the price of gold, the US financial sector has a large stake in the claim.
The FOMC, The Federal Open Market Committee, holds meetings every six weeks to debate the future of U.S. fiscal policy. After their June meeting, the Federal Reserve projected two interest rate spikes by the end of the year 2023, instigating a week-long decline in gold prices, the metal’s worst weekly performance in 15 months. Although two years is a long time, whispers that the Fed intends on raising interest rates sooner than expected indicates the U.S. dollar may be strengthened, which will likely weaken gold prices.
The relationship between interest rates and gold prices are held together by the glue that is opportunity cost. A rise in interest rates and the value of the dollar weighs on the gold price while higher inflation, lower interest rates and a weaker dollar provide support for the price of gold. Gold usually benefits during periods of low interest rates, as low rates make the opportunity cost of holding gold less. On the other hand, gold may potentially come under pressure as interest rates rise, due to the fact that gold does not offer any dividend or interest for holding it.
Key economic data is another important macro driver influencing the price of gold, especially that of the U.S. as it is the largest economy in the world and agreed to be the most important barometer for global economic stance. Economic data, such as:
- job reports
- wage data
- manufacturing data
- GDP growth
influence the Federal Reserve's monetary policy decisions, which in turn affect gold prices. A stronger US economy,
- low unemployment
- job growth
- manufacturing expansion
- GDP growth over 2%
has a tendency to push gold prices lower. Strong economic growth implies that the Fed could make a move to tighten monetary policy, thus impacting the opportunity cost dynamic discussed above. On the flip side,
- weaker job growth
- rising unemployment
- weakening manufacturing data
- subpar GDP growth
can create a dovish Fed scenario on interest rates and increase gold prices. Because of the economic renaissance catalyzed by the COVID-19 vaccine rollout, the first half of 2021 has seen gold prices pull-back from their all-time highs in 2020.
The rising price of goods and services also plays its hand at impacting gold. Sharing a positive correlation, higher levels of inflation often push gold prices higher, whereas deflation weighs on gold’s value.
Inflation is mostly a sign of economic growth and expansion. When the economy is growing and expanding, it's common for the Federal Reserve to expand their money supply. Expanding the money supply dilutes the value of each existing monetary note in circulation, making it more expensive to buy assets that are a perceived store of value, such as gold. This is why quantitative easing programs (like we saw following the COVID-19 outbreak) that noticed the monetary supply expand rapidly were viewed as such as positive for physical gold prices.
The pandemic itself in conjunction with post-pandemic recovery contributions have fluctuated the price of gold. It is clear that gold responds to various macroeconomic factors as it gains in value during times of volatility and falls in a risk-on environment when the global economy is performing well.
It is anticipated that the global economy will still continue to go through different stages of the economic recovery cycle but still with much uncertainty regarding the timing and scope.
The slower-than-planned vaccine rollouts, continued Covid fears, combined with fragile economic growth outlooks are culminating Central Banks around the world to decide on continuation of the low interest rate environment which could benefit the price of gold.
Within this continued environment of uncertainty, investors are continuing to seek to:
- diversify their portfolios to utilize gold as a safe haven asset class
- to hedge against potential adverse market corrections
- and to protect themselves from the uncertainty the future holds.
It seems counterproductive to argue that economic uncertainty is the strongest leg to stand on when preparing for the future. However if the pandemic taught us anything, it is to prepare to be unprepared. Uncertainties still lie within new COVID outbreaks caused by evolving variants and steadfast nonbelievers. Investing in gold is more attractive now more than ever because it is a measure of protection for your wealth. Although the anti-vaxxers and anti-maskers may not agree, the overwhelming global opinion seems to be:
more protection is better than less.
The good news, however, is that COVID-19 left a lull in the market ready to be filled with eager investors. Given the current rapid changes in global climate combined with more figurative changes in the geopolitical and economic climates, now is the optimal time to invest not just in gold, but in a company that speaks gold’s language. Coinful Capital is such a company.
As the pandemic began in 2020, Coinful Capital’s Pierce 50 strategy has shown robust performance despite global market uncertainties. As future economic recovery continues to remain uncertain, we believe we can continue to create value to our Pierce 50 investors.