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Gold prices hit nine-year high

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The economic turmoil of the Covid-19 pandemic continued to shake markets on Wednesday as gold prices topped $1,800 for first time since 2011.

Gold is seen as a safe haven asset for investors due to the fact that the amount of above ground gold is fairly static.  However, because investment in gold does not attract interest, the markets usually favour gold as a “last chance saloon” store of wealth, and with interest rates at historic lows and government spending burgeoning, the current interest in the precious metal could be interpreted as a lack of faith in the stock and bond markets.

The London Gold Fixing breached $1,810 during afternoon trading, as data emerged showing that investors had plunged a record $40 billion into funds backed by gold during the first half of 2020.

Gold-backed exchange traded funds garnered net inflows of $5.6 billion in June, pushing global holdings to a new all-time high of 3,621 tonnes, worth more than $200 billion, according to data published by the World Gold Council this week.

The Covid-19 crisis has cemented gold’s position as one of the best performing major asset classes of this year, rising over nineteen per cent of its January value.  James Steel, chief precious metals analyst at HSBC, one of the world’s biggest bullion banks, told the Financial Times that prices “were already rallying well before the emergence of Covid-19”, which has further added to their momentum.

On Wednesday, gold miners were among the handful of notable winners in early deals: Centamin, the Egypt-focused producer, climbed 5¼p, or 2.9 per cent, to 188½p; and Fresnillo, the Mexican miner, advanced 12p, or 1.4 per cent, to 897¼p.

Gold took a hit in March, when the scale of the impact of Covid-19 started to become clear, as investors rushed to liquefy their assets.  Unprecedented fiscal stimulus and monetary support packages unveiled since then by governments and central banks have subsequently made the bond markets less attractive, with some US Treasuries now yielding negative returns.

Following official reactions to the pandemic, gold has benefited as a safe haven and a hedge against riskier assets, particularly after the ending of US lockdowns has seen localised spikes in Covid-19 breakouts.

“Fears of further increases in infections and related lockdown fears have been driving demand and thus prices,” said Carsten Menke of Swiss bank Julius Baer. “This suggests that short-term price risks remain skewed to the upside as long as the virus does not come under control.”

Gold investors are now asking themselves whether prices will surpass their record high of upwards of $1,900 per ounce in 2011.

“The health, financial and economic uncertainties generated by the Covid-19 pandemic and its aftermath are likely to continue to support gold’s rally well into 2021, but at a reduced level, we believe,” said HSBC’s Mr Steel.

He thinks prices could reach $1,845 by the end of this year before falling back to $1,705 in 2021.

8th July 2020.