After coming under pressure in the last couple of weeks, the price of gold has surged by its highest margin in the precious metal’s trading history.
Indeed, Monday was the biggest one-day dollar gain on record, surpassing the October 25, 2011 advance of more than $70 an ounce that took the price above $1,700. In percentage terms, yesterday’s performance is the best in over a decade.
Gold has been on a rough ride over the past couple of weeks, dropping as low as $1,450 an ounce a week ago after briefly hitting a seven-year high above $1,700 in the previous week. It initially appeared to have succumbed to the volatility that had encased the rest of the financial markets; as institutions and hedge funds scrambled to cover their margins, they were forced to sell their precious metal assets and the price of gold declined.
However, the Federal Reserve’s announcement on Monday of massive quantitative easing and other measures to prop up the economy and markets seems to have been a key turning point for gold prices and it responded immediately by rising almost 4%.
For the first time, the Fed will back purchases of corporate bonds, backstop direct loans to companies and will ‘soon’ roll out a program to get credit to small and medium-sized business, flooding financial markets with so-called ‘easy money.’ While equities and gold soared, it remains to be seen whether this optimism lasts throughout the week.
In the short-term at least, the trend continued on Tuesday with the gold market ignoring the latest manufacturing data from the US that came in higher than expected. Gold continued to rise and is now up by over $100 in the first two days of the week, by almost 7%. This move comes amid news that three of the world’s largest gold refineries said they had suspended production in Switzerland for at least a week, with local authorities ordering the closure of non-essential industries to curtail the spread of Covid-19.
With President Donald Trump stating on Monday that he’s considering how to reopen the economy when the 15-day shutdown ends next week, there is growing debate that the US could turn into the next epicentre of the disease. A World Health Organisation official told the Washington Post that ‘we are now seeing a very large acceleration’ in US coronavirus infections, and disease experts have warned that the true number of cases in America is likely to be far higher than the official number.
This is likely to continue to drive volatility in the markets as governments around the globe grapple with the delicate balancing act of trying to reduce the rate of infection whilst also protecting their respective economies. In these unprecedented times, it looks increasingly like gold will also head into uncharted territory.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.