Despite signs of partial recoveries in some economies, international investors continue to look for safe-haven assets. The trend is apparent in the rise in gold prices over the past few months. This week spot gold prices rose to their highest – reaching $2,041 an ounce Wednesday.
The increase in gold past the $2,000-mark can mainly be attributed to the worldwide economic damage caused by the coronavirus. As economies continue to struggle with the effects of the health crisis investor confidence in traditionally safe bets such as government bonds, U.S. Treasurys and equities continues to dwindle.
The weakening U.S. dollar has made it easier for foreign investors to stock gold. Rock-bottom yields from government bonds worldwide have seen an unprecedented shift in assets. The continued release of stimulus packages by many governments worth trillions of dollars has generated fears of inflation – making gold a safer bet.
With the demand for gold increasing, gold-linked funds have had to keep up with the rising trend. SPDR Gold Shares, a publicly traded fund linked to physical gold, has had to increase its stocks in recent weeks. The fund, which is managed by the World Gold Council and State Street, reportedly increased its stocks to more than 1,258 tons. The stock is now larger than the gold holdings of some central banks such as the Bank of Japan and the Bank of England.
Market analysts predict that gold prices, which have already risen by more than 34.5 percent since the start of the year, could keep climbing. The forecast is based on the expected further weakness of the U.S. dollar.
Goldman Sachs forecasts that the U.S. dollar will weaken by a further 5 percent over the next 12 months as the U.S. is expected to lag behind other countries in terms of economic recovery. The yields of benchmark government bonds are expected to stay low throughout the year and in the first few quarters of 2021 as central banks attempt to encourage economic activity.
JPMorgan economist Bruce Kasman told clients most economies had managed to somewhat avoid a recession, with some now on a solid path to recovery. However, Kasman said there would still be challenges ahead. He said the momentum of gold prices would eventually fade but they would continue to climb in the short term.