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Gold as an Investment

Posted: Thursday, August 6th, 2020

Estimated Reading Time: 2 minutes

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The price of gold shot higher during the coronavirus pandemic. It hit all-time highs above $2,000 and keeps going. It has never been a better time to view the vital role of gold as an investment.

The only form of money that survived millennia, gold is viewed as an investment to protect against inflation. Developing, emerging, or frontier markets know very well what inflation does to the value of money. Therefore, their population has long used gold to protect against fiat currencies’ debasing.

However, the world has never seen a recession like the COVID-19 triggered. With virtually all economies around the globe facing recessionary conditions, investors remain with few alternatives to invest.

Gold as an Investment

Gold as an Alternative Investment

An alternative investment’s primary role is to protect the portfolio against inflation. Higher inflation devalues currencies, but gold keeps outperforming.

The spike higher in gold should not come as a surprise in the aftermath of the coronavirus outbreak. If anything, it makes it easier to observe the gold’s role as an investment and how it protects the portfolio.

Gold Denominated in USD

Traders are familiar with the price of gold denominated in USD – the XAUUSD. When gold in USD climbed above $2,000, there are two ways to look at things. First, one may say that gold reached an all-time high. Another interpretation, more accurate, would imply that the USD depreciated.

For this, traders and investors look at the price of gold denominated in other fiat currencies. For example, consider gold in EUR, GBP, or CHF. If all-time highs exist there too, the role of gold as an investment becomes obvious.

How High Can the Price of Gold Go?

Recent years led to unprecedented monetary policy experiments. Central banks in the developed world cut their rates into negative territory. Moreover, quantitative easing, the process where central banks buy their own government debt, led to lower yields.

Gold Price

Take the U.S. 10-year real yield, for instance. In 2020 it dropped below zero, offering a negative return for anyone interested in buying U.S. debt.

Therefore, it comes as no surprise that gold’s rising trend started at about the same time as the U.S. 10-year yield began its descent from 1%. With the fixed income market leaving few or no alternatives left to investors, gold looks like the obvious choice.

Some investors wonder why the price of gold broke higher nine months before the coronavirus pandemic. The answer comes from the U.S. fixed income market.

In other words, those paying attention to bonds had a few months leading into the crisis. This proves, once again, the crucial role of gold as an investment.

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