A COVID-19 vaccination appears to be just around the corner, and with it, experts are predicting a “bounce back” of the United States and other economies around the world. But it may be worse before it gets better.
Gold has been a strong asset throughout 2020, with a 16.8% increase in the first half of 2020.It significantly outperformed other asset classes. The price tag on gold in June was $1,770 per ounce, which is the highest it has been since 2012. In August, gold prices continued to skyrocket ,with the highest peak over $2,000 per ounce. Current prices are hovering around$1,800.
Now, analysts are trying to predict future gold prices based on the “shape” of the post-pandemic economic recovery.
Pandemic Recovery Scenarios and Shapes
The pandemic has certainly dampened the economy. The Dow Jones plummeted in April to nearly 35%of its pre-pandemic rates. The U.S. is seeing unemployment rates of over 10% in many parts of the country. However, while quarter one saw a huge dip in GDP, it has recovered roughly 66% in quarter 3. As we roll into quarter 4,improvements are expected to continue.
How quickly the world economy recovers dictates the “shape” of recovery. Experts are predicting one of the following scenarios:
While the recovery was initially predicted to be a sharp V-shape, by June, it was more along the lines of a U-shape. However, as numbers of COVID-19 infections have continued to increase this fall, a W-shape is forming.
The International Monetary Fund (IMF) produced a World Economic Outlook in October of 2020 that highlighted the increased global economic activity, but it also noted that many countries are slowing reopening and reinstating partial lockdowns as the infection rates climb: “The growth projections imply wide negative output gaps and elevated unemployment rates this year and in 2021 across both advanced and emerging market economies. Close to 90 million people could fall below the$1.90 a day income threshold of extreme deprivation this year. In addition, school closures during the pandemic pose a significant new challenge that could set back human capital accumulation severely.
The subdued outlook for medium-term growth comes with a significant projected increase in the
stock of sovereign debt. Downward revisions to potential output also imply a smaller tax base over the medium term than previously envisaged, compounding difficulties in servicing debt obligations.”
Gold’s Pandemic Performance
Gold has been outpacing the market for the past several months. By August, the price of gold had risen 28% from January 1, 2020. However, November’s gold price correction has seen gold’s levels become more in line with the market compared to previous months. But the slight decrease compared to the market has not done much to change the higher prices, and the uncertainty around the COVID-19 recovery could serve to continue a price increase.
Economic Recovery and Gold Prices
Gold demand has increased as investors and others become increasingly wary about the fluctuating economy. There also appears to be a discrepancy between the actual state of the economy and the current stock prices. Investors are concerned that they are witnessing another version of the “dot-com bubble” because of the pandemic.
Gold can be an effective hedge in an uncertain economy. Bonds, which are often seen as a safe bet alternative to stocks, are not expected to provide even their pre-pandemic low-level returns in upcoming years. Experts are predicting that bond return rates may be less than 1% for the next decade.
Gold may be a replacement for bonds as the return rates plummet. Gold has also historically provided a protective “layer” for investors when inflation rates are high. In years where inflation has been over 3%, gold prices have increased over 15%. Interestingly, however, even in periods of deflation, gold can do well too.
As high risk and uncertainty increases, such as in what is looking like a “W-shaped” economy recovery, gold demand (and therefore gold price) is also expected to increase.