Gold: breaking records of its own

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Personal Investing

11 August 2020

While Olympic athletes have been unable to exceed their personal bests this summer, gold has been breaking records of its own.

Under normal circumstances, August 2020 would have been when the curtain finally came down on the Tokyo Olympics to the cheers of roaring crowds, as record-breaking athletes were presented with their gold medals.

But while the games themselves have been delayed until next year, the price of gold in US dollar terms has been setting records of its own. Having surged by over 30% since the start of the year, gold currently stands at around US$2,000 an ounce – its highest ever level in price terms, although when adjusted for inflation, or rising prices, gold has been higher. So, what’s behind the rally?

According to our Currency Strategist team, uncertainty over whether the global economy is about to experience a second wave of COVID-19, coupled with escalating tensions between the US and China are just some of the reasons why the yellow metal, as it is also known, has been in such high demand. Another reason why, we believe, gold is wanted is that the world’s most widely used currency, the US dollar, is increasingly, in our view, losing its appeal among investors globally.  

Gold as a ‘safe-haven’ investment

There is nothing contentious about the fact that, during times of uncertainty, investors seek safety. As a ‘physical’ investment – you can see and touch gold – gold has often been dubbed as the ultimate safe-haven investment. While there is no guarantee that the price of gold will rise during times of falling stockmarkets, investors have typically looked to gold to limit their potential losses from other investments, such as company shares, as a means of diversifying their portfolios. Essentially, the old adage of not putting all your eggs in one basket rings as true today as it has ever done. You can read more about this in our blog on diversification.

Gold as a store of value

Another possible reason, we believe, for the rise in the gold price has been the unprecedented financial response of the US government to the recent pandemic. According to our Head of Inflation and Rates Strategy team, the scale of economic help to avoid the US economy falling into recession has been ‘fast and furious.’ But while millions of Americans have benefitted from this help in the form of generous social security packages, the injection of large quantities of cash has served to depress the value of the US dollar. (This is based on the simple laws of supply and demand where the more US dollars are in circulation, the less valuable they become). So gold, we believe, is not only benefitting from the fact that it is being sought as an investment in troubled times but, that relative to other currencies, it is, for the moment, retaining its value.

It is not our place to say here whether the gold price will continue to break new records, or whether it will take a breather from its winning streak. All we can say is that, over history, gold has, on the whole, been true to its functions of either a safe-haven investment or a store of value. In this respect it has, and we believe will continue to have, an important role to play in the investor’s armoury.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

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Risk warning

Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.

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