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Gold: is the next move up or down?

By Dan Atkinson

09:08, 8 April 2020

Gold investors may currently divide into two camps.

Those for whom the glass is half full. And those for whom it is half empty.

For those of an optimistic nature, the yellow metal is performing as one would expect during a global health emergency such as the coronavirus outbreak. One year ago, on 8 April 2019, it changed hands at $1,297.10 an ounce, itself an increase on the $1,201.90 seen five years ago, on 10 April 2015.

Ballooning government borrowing

Three months ago, gold traded at $1,566.50 on 7 January, but one month ago, on 9 March, it topped the price of $1,636.60 seen on 7 April and the $1,652.20 seen today, at $1,676.60. This morning’s price represents a 0.95% increase on the previous close.

So is the gold price softening. And if so, why?

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The bullion price run-up during the last year is, on the face of it, what one would expect given a number of factors affecting financial markets in recent months. Key to them has been the coronavirus, which, by shutting down large parts of the western economy, has greatly reduced the attraction of company shares. No-one knows which businesses will survive the coronavirus emergency, thus investors may be tempted to play safe and avoid equities.

More broadly, no-one can be sure what the economic landscape will look like after the virus has passed. Government borrowing has ballooned to help keep societies functioning, with unforeseeable consequences for the performance of public securities, chiefly government bonds.

Traditionally, these have rivalled gold as safe-haven assets, but it is far from clear for how long investors will continue to buy what seems an unlimited supply of such paper. In 1974, when markets resisted purchasing any more British bonds, the UK had to offer a record yield of 19% to tempt buyers.

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Trouble getting buyers to sellers

So, gold would appear to be fulfilling its historic role as a universally accepted store of value during turbulent times. Furthermore, ultra-loose monetary policies make gold more attractive when compared with assets denominated in national currencies.

But there are opposing factors that may be keeping the price in check and which may frustrate optimistic predictions of  $2,000 an ounce or more.

One is purely practical. Whereas gold can be bought and sold electronically or by telephone in western markets, in its Indian and East Asian heartlands it is often still bought physically, whether as coins, bars or jewellery. Tough measures to control the coronavirus, such as closing retail outlets, make it more difficult for customers to find their way to bullion vendors.

Another is that gold’s attraction tends to be burnished when inflation is high, and it is currently low across most advanced economies.

Finally, there may come a point, when supermarket shelves are empty and the economy seems to have ground to a halt, that bullion seems of little more use than paper currencies.

So, is the glass half full or half empty? The answer will depend on the progress or otherwise of attempts to bring the virus under control.

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