Investors seeking refuge in the safe haven asset
Posted on Jun 23, 2020 at 12:00 am
Spot gold was up on Friday, trading above $1740 per ounce. It had managed to cross the $1700 mark in April, but then was somewhat flattened at this level as global economies were gradually moving towards recovery and there were hopes of containment of this pandemic. Hence many investors moved their focus to equities. But lately, gold has once again become everyone’s favourite. More and more investors have started parking funds in this safe haven asset as a second wave of infection waits to take over. Following a surge in new cases in countries including the U.S., China, Germany, and South Korea, and Australia, optimism has been replaced by some caution around whether the latest outbreaks can be contained.
The possibility of a second wave casts shadows over the much sought after V-shaped economic recovery. As highlighted by comments over the weekend from Boston Fed President Rosengren who said that a second wave would impact the potential for a sound second-half economic recovery and would require more fiscal and monetary support.
The uncertainty created by the second wave and the prospect of more fiscal and monetary support is supportive of the macro narrative surrounding gold, and after a rally this morning, gold is on the verge of confirming that its uptrend has resumed.
Now, investors are allocating almost 10 percent of their funds into gold, which was just 2-3% before the pandemic.
There is much discussion and hopes in the market that gold will soon cross its lifetime high, as the global situations seems to worsen.
There is more of fear driven investment demand. As fear looms over financial and economic development, demand for the yellow metal tends to rise.
Currently investors are looking in to park their money into the following assets-
- Gold
- Real Estate
- Stocks
- Inflation linked bonds
Of these, gold and inflation linked bonds are the most sought after ones. Gold tends to benefit from widespread stimulus measures from central banks because it is widely viewed as a hedge against inflation and currency debasement.
Global prices have rallied about 15% this year, supported by safe-haven demand in the midst of concerns of an economic slowdown and unprecedented amounts of government and central bank stimulus that has raised fears about inflation.
The recent explosion of government spending and central bank stimulus may finally rouse inflation from its decade-long slumber.
With the world economy forecast to shrink 6% this year, it may seem like a strange time to worry about inflation.
Investors have an interest in pricing future inflation correctly to safeguard their returns, hence the need for hedges, assets that increase in value or at least hold it when price growth accelerates.
They appear primarily to favour U.S. inflation-linked bonds and gold and not equities. Rising corona virus cases in the Unites States dented investor sentiment towards riskier assets, sending U.S stock futures lower.
Gold continues to soar as surging Covid infections intensified concerns over a delay in global economic recovery and prompted investors to seek the safe haven asset.
