Many experts in the economy can verify that the coronavirus pandemic has caused an excessive increase in free sales.
Analysts argue that the situation shows how fragile today’s dollarized financial world is. The massive purchase of gold is a typical sign of panic.
The coronavirus crisis has disrupted the forecasts of governments, companies, and investors worldwide. During the second half of March, investors have seen international markets suffer one of the most massive stock market crashes in history.
In this condition of generalized falls, the precious metal has been one of the assets that have performed best, being able to maintain a positive appreciation so far this year. But what are the keys that determine the price of gold?
Investors detail some of the aspects that have influenced the precious metal.
The Dollar is One of the Most Decisive
The rates of raw materials in the international market are established in dollars. If the dollar rises, buying gold prices climb in the rest of the currencies. The Dollar Index measures the relationship of the US currency to a basket of currencies, such as the euro, yen, or pound sterling. If the difference increases among these currencies, it means that it strengthens against them, while if it decreases, it weakens. Besides, in this situation, investors also acquire dollars to the detriment of the precious metal. Also, if the dollar is weak, the opposite situation occurs, the demand for gold increases, and the price rises.
If entities such as the US Federal Reserve or the European Central Bank lowered the official price of money, the returns on the most traditional investment instruments are reduced. It leads investors to take refuge in alternative options, including physical gold, and it increases the purchases and the price. The reverse occurs when interest rates rise.
Inflation affects on gold
Gold has traditionally been an inflation protection tool. Typically, when there is an increase in inflation, there is also a rise in the price of gold, as investors abandon the foreign exchange market.
Production of gold
Precious metals have limited resources, and their production cannot be increased on demand. Most of the mined gold continues to circulate. Recycling is so important that it covers almost a third of the world’s gold market. Recently, we are seeing how the thin gold distribution and manufacturing network existing in the world is in danger of shortages due to the need to stop production.
Geopolitical and Economic Uncertainties
Typically, in times of instability, gold rises as investors take refuge in it. Apart from the current coronavirus crisis, Brexit and the trade tensions between the United States and China in recent months affected it.
Central Bank Purchases
The latest official data reflects that until September 2019, central banks had purchased 73% more physical gold than in 2018. The more demand, prices increase.
Gold is a haven when Investors’ Need Liquidity
Gold is insurance that protects the rest of the investments in a diversified portfolio. During the significant falls in the financial market, investors resort to the liquidity that gold gives them to cover the losses generated by their other investments.