Gold’s advance nears all-time high
Gold’s advance nears all-time high
Gold is a highly unique investment. Traditional investments, such as stocks, bonds and currencies, have no intrinsic value. Instead, their value is based by fiat – a declaration of value based on the faith and confidence of the issuer.
But gold and other precious metals are seen as a tangible, physical asset that will always have value. This value may rise and fall, but over the centuries – even in the worst of economic and financial collapses – gold has proven its ability to store wealth.
Gold is a global commodity, subject to global forces of supply and demand. And so far this year, those global forces have sent the price of the yellow metal soaring.
On Wednesday, gold closed at $1,820.60/oz. – its highest closing price in almost nine years, according to trade data at the New York Mercantile Exchange. It is quickly approaching its all-time high of $1,891.90/oz., set in August 2011. Year-to-date, the price of gold has risen 19.5%. Nearly half of this gain has come since June 5.
For investors, gold’s 19.5% gain this year has outpaced the major stock market indexes. The recent surge in technology stocks has driven the tech-heavy NASDAQ up 16.9%. The S&P 500 (-1.9%) and the Dow Jones Industrial Average (-8.6%) lag well behind.
Because of its ability to store wealth, gold is often viewed as a safe haven for global uncertainty and market turbulence. The flood of investor cash into gold suggests an underlying anxiety on the sustainability of recent stock market gains and the impact of the COVID-19 virus on the U.S. and global economies. The ongoing escalation in the number of COVID-19 cases has also triggered concerns that state governments will be forced to scale back their reopening plans – placing further strain on the economy and labor market.
The rise in gold has also been fueled by the rapid decline in interest rates. Gold prices are extremely sensitive to changes in interest rates. As interest rates decline, gold tends to rise. To help spur economic growth in the face of the global pandemic, in March, the U.S. Federal Reserve slashed the benchmark fed funds rate from 1.75% to near 0%.
Apart from any price appreciation determined in the open market, gold bears no dividends or interest payments. It must compete with interest-bearing investments, such as bonds, for investor funds. As interest rates rise, investors typically shed non-yielding assets such as gold in search of higher yields in other types of investments. But with interest rates at/near historic lows, there is less of an opportunity cost in buying gold as a safe haven investment. Consequently, investors are now more willing to buy gold because the interest payments they could receive on other investments are relatively low.
The future of the current gold rally is unknown. However, interest rates are expected to remain low while questions linger on the state of the U.S. and global economies – both key tailwinds of support for gold prices. But so far, gold investors have been heavily rewarded.
Mark M. Grywacheski, Investment Advisor
Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets, or developments mentioned.
Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
