UPDATED: 8/7/20

Gold and silver had a nearly five-day streak with record-breaking highs. This modern-day gold and silver rush mostly flourished around the uncertainty of the long-term economic impact of COVID-19. However, by Friday, gold futures finished significantly lower, which consequently lowered gold spot prices

Gold and silver snatched the spotlight this week because they made leaps and bounds to new highs not seen on record for a long time. Gold surged to records not seen since September of 2011. Additionally, the silver spot prices broke past $28 per troy oz, speeding towards what could soon possibly be $30. So what led to these massive gains for precious metals? What is making gold just as pricey as palladium, and why is it falling at the end of the week?

Gold Spot Prices

Amid the coronavirus pandemic, the US is yet to fully gain control over the spread. As cases rise, investors continue to fear the future of the economy and move in droves to safe-haven gold and silver. Altogether, the gold spot prices grew more than 30% this year so far. So, they are on par to have a “golden year” that parallels that of 1979. CEO of US Global Investors, Frank Holmes, believes gold will reach $4,000/oz by the end of its bull run. 

However, by August 7, the gold spot price began to fall. The price faltered in response to the resurging US Dollar and a steadying unemployment rate that fell mostly according to expectations.

The Rise of the Gold Spot Prices

One of the biggest headlines this week was the explosions in Beirut that caused astronomical levels of damage and injuries or death to many citizens. Mizuho Bank believes this also pushed the gold price higher as investors question what truly occurred there. 

More developments that add to investors’ confidence in gold and silver involve continued concerns about price inflation in the near future, and, most importantly, a new round of US government stimulus. This stimulus that is currently being discussed will add to the growing money supply and, piling on top of the growing reality of inflation. Moreover, if businesses have no interest in spending, the next stimulus might do next to nothing to help combat inflation.

Holmes also suggests that there may be price corrections, however, he advises anyone interested in buying gold to purchase it on the dip. Specifically, he says:

“Every time you have a secular bull market, there are many 10% corrections. So you can easily get a 10% correction in stocks, if you get a 3% correction in bullion […] It’s just recognizing that that ratio of 3-1 is important, and if you have the stomach to weather it.”

CPI, The Dollar, and Negative Interest Rates

Holmes also expects inflation to grow, but with rates staying low, there is a negative real rate environment. He attributes the negative interest rates as a leading cause in the rise of the price of gold.

Additionally, Congress and the Federal Reserve are doing all they can to spark consumer spending with negative rates, fiscal spending, and subsidized loan programs. But, Morgan Stanley questions the Fed and Congressional control of the money supply growth. According to them, if the M2 is not under control, then neither is inflation. Reportedly, the US money supply ballooned 20% from $15.33 trillion at the close of 2019 to $18.3 trillion at the end of last month.

Morgan Stanley chief U.S. equity strategist Mike Wilson wrote “Congress is now the critical player in driving money supply growth with the Fed fully committed to doing whatever it takes. This is very different from the post [financial crisis] era when aggressive monetary policy was unmet with a willing borrower and spender. We think this poses a greater likelihood for inflationary pressures to build.”

Money Velocity

Money velocity, the measure for how frequently consumers buy, is commonly used to gauge the health of the economy. This velocity has been decreasing. To put this into perspective, the velocity usually slows during recession and speeds with a healthy economy. As people stockpile their cash, it does nothing to help the GDP or curb inflation.

Holmes also suggests that money velocity is no longer a great measurement for inflation. This is because money velocity does not account for low interest rates. He also says “The calculations for CPI [the consumer price index] for when gold had hit $850 has changed many times.” This further makes the former reliance on money velocity less accurate in his eyes.

Gold VS The Greenback

So, what does this have to do with the gold spot prices? Do not forget: as the US Dollar, also called the greenback, weakens against other currencies, the gold spot prices will become cheaper in other currencies. As a result, demand for gold will soar higher, causing the prices to climb. Also, as confidence in the dollar wavers, gold sparkles more in investors’ eyes.

In contrast, the end of this week resulted in the gold spot prices trading lower and cutting off the 5-day streak. Gold lost its high gains after job-market data fell more or less in line with expectations regarding unemployment. Estimates that MarketWatch polled from economists showed that there was an increase of 1.7 million jobs in July. This unemployment rebound leads investors to return to the dollar and other commodities once again. 

As expected from a resurrection of trust in the greenback, gold tends to fall lower as a result. But, many believe that gold will continue to be bullish in the long run. This is because of the overall global investment landscape. Unabating tensions rising between the US and China also contribute to this atmosphere.

In Conclusion…

It appears that economists and analysts are mostly in agreement that precious metals will continue to rise in the long run. Investors are back and forth on the value of fiat currency. Specifically, the factors most in the forefront of investors’ minds are the:

  1. Monetary easing and increased government spending in the environment of the COVID-19 pandemic.
  2. Unemployment rate and expansion of jobs in the US.
  3. Rising tensions between the US and China.

So despite the good economic news this week, uncertainty still clouds over the economy. While investors take a deep breath for the time being, there are many unpredictable factors that will return to the public eye soon. As long as COVID cases continue to rise uncontrollably, the fate of the economy is in limbo.

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