We’ve been here before. It all feels a little bit like the spring of 2009. The financial collapse, the initial, short-lived rally in gold, and then the subsequent surge in demand for the precious metal as central bank intervention and other risk factors drive investors out of other assets.
It is a familiar tale. Here at The Armchair Trader we have been bullish on the prospects for gold and silver since the early weeks of the coronavirus spread out of China. We are now seeing a sustained rally in the gold price with both short term traders going long gold CFDs and others piling into long gold ETFs.
“With the prospects of a smooth recovery in the US economy continuing to diminish as coronavirus cases soar, the US currency — the most important currency globally and one which acts as the benchmark for most financial assets — continues to weaken,” observed Adam Vettese, Market Analyst with eToro.
The knock-on effect was clear, with the price of gold hitting a record peak of $1,944 in trading in Asia before settling down slightly at $1,932. The precious metal has been one of the top performing assets since the pandemic began and is up more than 20% since mid-February alone.
The gains for gold and other assets, including Bitcoin which also broke through the $10,000 resistance level to hit a near six-month high, come as Republican lawmakers prepare to reveal their proposal for what should be included in the next pandemic stimulus bill.
Another round of cash payments to Americans is on the cards, and a key point of contention will be the extension of a $600 per week boost to unemployment benefits, with the FT reporting that Republicans will instead propose capping benefits at 70% of prior wages.
Investors are also buying gold because they are worried about the rhetoric being used in the ongoing political dialogue between the US and China, none of which sounds friendly. The two countries have graduated from trying to hammer out a contentious trade deal to closing each other’s consulates. The US has also made another arrest of an alleged Chinese spy in San Francisco, which is, perhaps not coincidentally, also the USA’s key technology hub.
Investing in gold
Investors are taking a number of routes into gold. Short term traders are using CFDs and financial spread bets based on the gold price, but there is also growing interest in gold ETFs, of which there are more now available than there were in 2009. Gold ETFs represent a convenient way for investors who do not want to trade ETFs to access gold price dynamics without going to the futures market. Many gold ETFs can be traded like shares and represent the price of real gold bullion assets held in secure vaults.
According to recent data from ETF specialist TrackInsight, 40% of investors using ETFs to get exposure to commodities (and other alternative investments) were using them to get into gold. We anticipate that this number has gone up over the course of the last six months.
TrackInsight reported on Friday that week to date (24 July) investors added $2.6 billion into the 62 gold ETFs it tracks. The cumulative performance of those gold ETFs is over 23% year to date.