Gold reaches an all-time high

Gold reaches an all-time high

05 August 2020Reading time: 3 minutes

The gold price almost reached 2000 USD per ounce on July 29th 2020. Since the beginning of the year the gold price increased by about 30%. This price evolution is mainly due to the COVID-19-crisis which led to an increase in the gold demand and a decrease in the gold supply.

An increase in demand

In times of turmoil in the stock markets, gold is often considered as a safe haven. For example, after the 2008 subprime crisis, gold became an attractive asset for investments. This is also the case for the COVID-19 crisis: many investors are considering it as too risky to invest in stocks due their high volatility. Usually in times of crisis, bonds with a low risk of default are also an attractive investment. One advantage of investing in bonds is the interests that the investor receives, but on the other hand, bonds generally don’t offer protection against inflation. Even though gold doesn’t pay interest, it can be an interesting investment because its price is generally strongly correlated with the inflation. Therefore, gold is often considered as a possible hedge against inflation.
Due to the current low interest rates, investing in high quality bonds is less interesting and therefore gold is preferred by many investors. This is especially true in the United States. Investment funds invested massively in gold and gold-ETFs. In the first half of 2020, the United States represented 75% of the investments in gold-ETFs according to the German financial newspaper Handelsblatt. There was also an increase in the demand for gold in Europe. For example, in Germany the demand for gold bars and coins increased by 120% compared to the first half of 2019. Germany is now the largest market for gold bars, ahead of China. In total, German investors bought 83 tons of gold during this period.   

A decrease in supply

Another factor, which explains the gold price increase, is that the gold production significantly decreased in the first half of 2020. Compared to the first half of 2019, the gold production decreased by 6% to 2192 tons. This decrease is due to a decline in mine production (1603 tons compared to 1692 tons in the first half of 2019) and a decline in gold recycling. The production decrease was particularly important in the second quarter of 2020 (-15% compared to the same period in 2019).
This decrease in gold production is mainly due to the lockdowns imposed in many major gold producing countries due to current pandemic. China, the largest gold producer, suffered a significant decrease in gold production in the first quarter of 2020 (-9% year on year): the mining industry was strongly affected by the restrictions put in place to control the spread of the virus. The other major gold producing countries were mainly affected in the second quarter of 2020: compared to China, lockdowns were imposed much later. Mexico’s production decreased by about 62% in the second quarter as almost all mining activities had to stop due to the virus. For the same reasons, the South African production dropped by 59% and the Peruvian production by 45% year on year. The only exception is Russia, where the production increased by 15% in the second quarter of 2020 compared to the second quarter of 2019.
The almost continuous gold price increase since March 2020 is explained by the combination of a lower supply and a higher demand. 

Gold as an asset

The 52-weeks high of USD 1978.48 was reached on July 29th 2020 and the 52-weeks low of USD 1440.83 was reached on August 2nd 2019.
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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18/09/2020 19:44:40