Currently, Wall Street is experiencing strange times. The stocks are exploding on optimism about a possible economic rebound but investors are still worried about the increasing threat of the second wave of coronavirus cases in the US.
Just look at how gold is rallying.
The price of the yellow metal soared above $1,800 an ounce representing its highest level since September 2011. Based on the fundamentals, it seems like it is crawling toward the record high of over $1,900. In 2020 alone, gold has gained almost 19%.
This continued rise in the price of gold is somewhat curious since there might be a comeback in the wider market. The spike in gold price earlier in the year made a lot of sense since gold mostly seems to do great in times of financial crisis, especially when fear is prevalent.
After a significant drop after the 2008 Lehman Brothers bankruptcy; gold exploded as the market melted down later in that year and into early 2009. Then, gold prices hit an all-time high in 2011 after Standard & Poor’s downgraded the United States’ credit rating.
The downgrade came amid market jitters about Europe’s sovereign debt crisis; that was threatening to dismantle many of Europe’s economies like Italy and Greece.
Gold Acting As A Hedge
Increasing anxiety on Wall Street over COVID-19 explains the surge in gold price. One Index, CNN Business Fear & Greed Index, which measures up to seven indicators of investor sentiment, appears to be moving back toward ‘fear’ zone after it hit ‘greed’ levels barely a month ago.
Notably, the investors have decided to flock to gold which is a sign of stress despite a major rally in the tech stocks and the wider market. It shows that the investors are putting their confidence in gold.
What is happening? Some of these investors may be continually hedging their bets. Nevertheless, there is still intensive skepticism that is currently affecting the fragile recovery. Acquiring gold may be a good hedge against a potential stock market pullback in the case that the rebound in earnings; and the economy does not materialize in 2021 as anticipated.
Interestingly, investors may also be betting on an eventual surge in inflation. The chief investment officer for Sparrow Capital Management, Gerald Sparrow; told CNN Business that the increasing amounts spent in stimulus packages around the world; may result in hyperinflation in the global economy.
Sparrow said that the gold prices tend to soar whenever the Federal Reserve has decided to keep interest rates extremely low as it is currently doing. The Fed is also attempting to enhance the economy by getting more money into the system with many loan programs.
All of this stimulus might in the end weaken the value of the dollar. In turn, it will create higher inflation pressures. If such a scenario arises, it would be very good for gold price which might surge towards the $2,000 levels.