(Aidan Miao and Satvik Deolal)
Gold is one of the most popular and valuable precious metals of all time. Its shine and value are some of the reasons why gold is used everywhere. Whether it be used jewellery, electronics, or even buildings, gold is popular for its look, regard to be expensive, and other qualities such as conductibility, malleability, and ductility. But one of the most popular uses for gold is in the financial markets. The gold business has been the backbone of so many nations in trading. As of right now, the price of gold is going through a volatile spree due to a lot of uncertainty in the markets. The U.S elections and COVID-19 have greatly affected the supply and demand of the precious material.
The price for gold at the moment is highly speculative. Politics, International Relations, and the Supply & Demand for the material play a huge role when it comes to its pricing. In the short-term, one can expect the gold price to have a bullish outcome, but once investors get to know the outcome of important decisions, the price of gold will stabilize.
(Source: BullionVault)
As we can see in the chart above, the price for gold has increased dramatically in this past year. On 1st Jan, the gold price was 1530 USD per ounce, and in August the gold price has reached a nominally highest point at 2040 USD per ounce. Since then the price has fallen a little but stays steadily above 1850 USD per ounce.
A big question now is how will the US election results affect the gold market.
Generally speaking, the gold price is correlated with the level of uncertainty in the overall economy and also the strength of the dollar. In the past four years of his presidency, although Trump has been viewed as a president who breaks norms and there is a high level of unpredictability as to what he would do, we do know that he has a history of being “corporate-friendly”. He introduced tax cuts to big corporations and also deregulations during his administration, and that has gained him favors from big American businesses(economist). If Trump wins the election, it is likely that he will continue to stay tough on China, and trade tensions will likely stay high.
Biden, on the other hand, favors a greener economy, and made promises to a Green New Deal, where he will be committed to “a federal investment of $1.7 trillion, leveraging additional private sector and state and local investments to total to more than $5 trillion” (JoeBiden.com), and this would drastically increase the national debt while it is already at an extremely high level. An even higher debt level would mean a weaker dollar, and this is likely to mean higher gold price. As with trade policy, Biden in fact will not reduce tariffs and de-escalate tensions with China as many expected. He claimed that “economic security is national security”. As he is promising to invest in a greener economy, to have the US emit zero carbon by 2050. He especially emphasized that the goal is so that “America is the engine of the world’s clean energy economy, exporting cutting edge equipment, stamped Made in the USA”(the economist). This America-first policy which seeks to increase American exports, together with an already zero interest rate, will mostly further weaken the dollar, and that will likely increase the gold price.
What will bring more chaos is in the situation where Donald Trump refuses a Biden victory. Trump had refused to comment on a peaceful transfer of power many times when he was asked by journalists, and vice president Mike Pence also evaded to answer this question on the vice presidential debate (Forbes, NYT). If such chaos really happens in the White House, we can only expect huge volatility in stock markets and also in gold prices.
Since the establishment of financial markets, mankind has faced several recessions. During these recessions, people tend to lose their jobs and their financial strength. Amidst tough times like these, people tend to invest in items that are rather unaffected by currencies. Commodities like gold are in high demand during recessions (Greg-Brewer, 2020). However, during the 2008 financial crisis, the price of gold dropped by 25% (Dirkmaat, 2018). Although, it may look like this doesn’t make sense, it does if we inspect the background a bit.
The Golden Dilemma, Erb and Harvey (2013) note that there is a positive relationship between the demand and price of gold. That essentially means that, as more people buy gold, the price goes up, in line with demand. It also means there aren’t any underlying “fundamentals” to the price of gold. If investors start flocking to gold, the price rises no matter what shape the economy is or what monetary policy might be. Therefore, the idea that gold is a safe haven during recessions has been filled in the mind of investors which leads to high demands.
The 2nd wave of COVID-19 has recently begun in the countries that have the highest demand for gold; China, U.K, U.S, and India. China’s increase in the demand for gold can be mainly attributed to the government making it easier to buy gold, the growth in urban population, and a rise in household income (Cheng, 2014). Similarly, India’s growth can be explained by gold’s attachment to India’s culture, growth in household income, and an extremely fast growing urban population (Anonymous, 2017). The U.S and U.K’s growth in demand comes mainly from weddings, as gold is a symbol for the emotional and important events that happen in their lives (Anonymous, 2020).
As of right now, the demand for gold is very high in China, the U.S, and the U.K. In the U.K, The Pure Gold Company, which buys physical gold and silver on behalf of private investors, saw a 987% increase in gold sales over the last seven days, compared to the weekly average over the last year (Kubiak, 2020). On the other side of the world, demand in China has increased by over 38% (Tycango, 2020). People are now able to buy gold in China due to the abolishment of strict precautions. Now consumers can go into physical shops to buy and verify that the quality of gold they are receiving is pure (Tycango, 2020). Within the U.K and the U.S, no strict precautions have been taken which have allowed people to buy gold normally as they would. Although in the U.S, the dollar has been rising over the past few months (Watts, 2020), this is a huge drawback for the price of gold as they are inversely related. On the opposite end of the spectrum, India has not been very successful with dealing with COVID-19 as they have the 2nd most cases in the world (Anonymous, 2020). This has led to strict measures being taken by the citizens in order to reduce the spread. This has led to an all time low in demand for Gold in India in 26 years (Jadhav, 2020).
In the past, Gold prices have been driven up during recessions. In the graph, there are 5 spikes in the price of gold, all these 5 sudden rises in price happened during a recession. The 3 spikes on a timeline can be identified as: the Oil Crisis in Iran and the increased demand from emerging economies like India and China. The final rise can partially be explained by COVID-19 but it has been rising since 2018.
(Source: goldprice.org)
India is a key player in the demand for gold. India is responsible for a quarter of the world’s demand for gold (Jamasmie, 2017). As seen in China, there have been incidents of “Revenge-spending” (Frank, 2020). In a country like India, where gold is a huge part of the culture, the restrictions could lead to a perfect recipe for revenge spending by the urban population of India.
As the 2nd wave has just started for the biggest demanders for Gold, it is certain to say that a recession is coming. The price of gold seems slightly bullish in the short term. In the long-term, we can expect the price to be less volatile after we completely see the impact of COVID-19. The impact of the big players, COVID-19, and the U.S elections play a huge role in the forecast of gold.
References
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Industry Jargon:
- Bullish: Upward trend in the market
- Oil Crisis in Iran: Iranian Revolution, also called Islamic Revolution, is a popular uprising in Iran in 1978–79 that resulted in the toppling of the monarchy on February 11, 1979, and led to the establishment of an Islamic republic.
- Revenge-Spending: Huge amount of spending behaviour by consumers after a long period of inability to spend. The term revenge is used as a way to balance the period of minimal-spending.
- Recession: A period of temporary economic decline during which trade and industrial activity are reduced
- Urban Population: People who are residents of cities.
- Deregulation: the repeal of government regulations in the economy.
- Green New Deal: The Green New Deal (GND) is a proposed package of United States legislation that aims to address climate change and economic inequality.
- Volatility: the degree of variation of a trading price series over time.
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