COVID-19 has imbued the markets with an unprecedented level of uncertainty. So much so, that investors will likely be using 2020 in the future as a reference point to understand how different commodities, currencies and stocks behave in periods of extended market volatility.
The reason this pandemic is distorting the markets to this incredible extent is twofold:
Firstly, the long-term implications of the pandemic on the global economy are not yet fully understood. It may be the case that a new enthusiasm for protectionist policies follows COVID-19, with profound implications on international trade and global supply chains. The last truly global pandemic, the Spanish Flu Outbreak of 1918-1920, required two diplomatic summits afterwards just to agree on how individuals should and could travel across nations in the wake of the pandemic. What will it take this time for states to trust each other again after COVID-19?
Secondly, the nature of this being a public health crisis as opposed to, let’s say, a financial one, means that it is fundamentally impossible to accurately forecast a recovery timeline. No-one knows when a vaccine will be produced or if a virus mutation may lead to a second spike in cases. It may be that COVID-19 remains omnipresent on business and government agendas for years to come.
In short, what this all means is that actively managing one’s portfolio becomes intensely difficult. Investors and traders need to take into account a range of circumstances and appreciate that all best case and worse case scenarios are still on the table.
A critical juncture
Financial markets have begun posting positive figures and global economies are beginning to signal growth in GDP once again.
This trend was accelerated recently in Europe as, on the 20th of July, EU leaders successfully negotiated a €750 billion recovery plan among all of its member nations. In response; shares of EU companies rose, the Dow Jones Industrial Average gained 1.03%, and the Euro hit its highest level against the US dollar since March.
All of this is welcome news; however, it only tells part of the story. Safe haven commodities traditionally surge in value when markets are in turmoil, however gold prices are still currently trading at a record high of $1931 per ounce [at the time of writing]. This is the result of the price of gold having increased by 28% in 2020 alone, a trend which commentators believe will continue until gold surpasses $2000 per ounce.
Such a misalignment along traditional investor logic has left many confused. Have we entered a period of a post-pandemic market recovery, or do investors see now as the calm before the storm?
Rushing to gold
The simple reason that the value of gold is set to increase further this year is a product of investors hedging their bets. Investors and their brokers are able to use gold to hedge against market uncertainty and improve their forecasted returns after various risk-adjustments. In addition, Gold also simply provides access to a liquid asset that’s famously resilient in times of global volatility.
The fact that we recently saw gold break through its all-time-high of $1920 is leading many commentators to believe that this will spur further demand.
Of course, this will not be the result of a straight-line trajectory; and events that unfold in the geopolitical and pandemic spheres can still majorly impact how this trend plays out. At present, this surge in gold is merely the result of market uncertainty encouraging investment in safe haven assets, with precious metals the prime choice, and should not be seen as indicative of an incipient market crash. At least, not for the moment.
When’s the right time to get into gold?
For those looking for the right time to invest in gold, the go-to reference tool is the Volatility Index or ‘VIX’. By analysing investor behaviour and future forecasted risk, the VIX represents a 30-day projection of the predicted volatility expected to be experienced by the major global markets. In this time of unprecedented uncertainty, the value of such a tool cannot be understated.
Based on previous performance, a decline in the VIX should normally be followed by a rise in the value of gold. Similarly, a rise in the VIX traditionally precedes a drop in gold prices. If one is interested in investing in gold, therefore, closely watching the VIX will help determine when it is best to buy and sell the precious metal.
Ultimately, those interested in gold should not invest purely because of its current upwards trajectory. Any investment decision needs to be part of a wider portfolio strategy and lead to a definitive goal. Hastily chasing daily, or weekly, trends will often incur a loss of capital; as opposed to taking a step back and evaluating how one can best take advantage of current market dynamics whilst never losing sight of their original financial objectives. If investors and traders remember this, they will be best positioned to take full advantage of gold’s future price movements.
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Giles Coghlan is Chief Currency Analyst at HYCM – an online provider of forex and Contracts for Difference (CFDs) trading services for both retail and institutional traders. HYCM is regulated by the internationally recognized financial regulator FCA. HYCM is backed by the Henyep Capital Markets Group established in 1977 with investments in property, financial services, charity, and education. The Group via its relevant subsidiaries have representations in Hong Kong, United Kingdom, Dubai, and Cyprus.