From safe haven to sensational investment

From safe haven to sensational investment

23 June 2020Reading time: 3 minutes

In times of economic turmoil, gold has often been a fairly stable investment. Also during the corona crisis, both private and institutional investors sought salvation with the precious metal. At the same time, even gold does not seem intangible to the whim of this exceptional situation.

Gold as a safe haven

The global outbreak and spread of the coronavirus combined with the oil crisis earlier this year led to the first stock market crash since the financial crisis. Stock markets plunged into red numbers and as usual with financial turmoil, investment portfolios were rapidly filled with gold and gold ETFs.

There are three main reasons why investors chose gold as an investment:

  • As protection against inflation
    As protection against large currency fluctuations
    As protection against stock market crashes and large stock price declines

Historical research has shown that in the event of market turbulence, the chance that the gold price will also fall in line with the stock exchanges is fairly small. Gold could also be a suitable alternative for the very low and negative interest rates on savings that are currently happening. During uncertain times, some investors also prefer to invest in tangible things which is the case with precious metal.

Logistic problems

Due to the lockdowns in several countries as a results of the coronavirus, delivery problems of physical gold bars arose. This was mainly due to large gold smelters in Switzerland, among others, who had to temporarily stop their productions. In addition, the transport of gold was also complicated by the fact that practically all passenger aircrafts were grounded. Gold bars are usually transported via direct passenger flights, because cargo flights often make multiple stops and this increases the risk of theft.

By now it seems that most of the logistic problems have been solved. For example, late April the largest gold smelter worldwide in Australia send an airplane filled with gold bars to New York. Especially in the United States, the shortage of gold became a real problem. It remains to be seen if the gold shortage will continue to decline in the coming period.

Outlook coming period

At the moment of writing (15-06-2020) the gold price is $1.720,48 per troy ounce (31,1 grams), which is the highest price since October 2012. It is unclear whether the gold price has reached the ceiling now. The opinions of analysts and economists are quite different on this matter. In September 2011, the gold price was even more than $1.900 per troy ounce.

Now the logistic problems seem to have passed and shortages are reduced, investors could have a reason to sell their gold. However, rumours about a deep global recession could cause for a unchanged high demand for gold.  

For example, the OECD (Organisation for Economic Cooperation and Development) expects the global economy will shrink this year with 6% on average. There is also still fear of a second wave of a coronavirus outbreak. It is these kinds of uncertainties that can make many investors decide to invest in gold again.

Besides investing in gold, investors could also invest in listed goldmine companies. The largest  goldmine company worldwide is Newmont Goldcorp, followed by the Canadian Barrick Gold. These companies also took full advantage of the explosively increased demand for gold and as a result, their stock prices also increased significantly in the past months. The future will show whether these goldmine companies can maintain their high share prices.

The future price of gold is subject to several political, industrial and sector specific as well as economic factors. Investors should consider these risks when making their investment decisions. Developments can be different at any time than investors anticipated on, which could result in capital losses.

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09/07/2020 13:19:07