TOKYO / NEW YORK – The price of gold increases as the coronavirus rages around the world and the US dollar shrinks.
According to the World Gold Council, the demand for gold jewelry in China in the first half of 2020 was 52% less than a year earlier. For Chinese, gold is a symbol of wealth and status, but the pandemic has hit the economy hard, making prestige less of a priority.
Even in May, after China ended its lockdowns, unemployment rose in 31 of the country’s cities, sending consumption into decline.
In India, where gold is also respected by status seekers, the demand for gold jewelry dropped 60% in the first half of 2020 compared to a year earlier. Here, too, unemployment is rising and consumption is declining, leaving people unable to pay for jewelery.
In contrast, investment flows in gold. In New York, futures peaked at $ 2,000 per troy ounce at the end of July.
Between January and July, exchange-traded funds with gold saw an inflow of $ 49.1 billion, 95% of which came from funds in Western countries.
Bank of America analysts recently released a report in which they gave gold a price target of $ 3,000 per troy ounce once in the next 18 months.
In March, the Fed announced a new round of quantitative easing and began purchasing U.S. Treasuries and corporations. It also began providing greenback to central banks around the world through swap arrangements.
As a result, the Fed is pushing massive amounts of dollars. The monetary base, which measures the amount of credit by the bank, was more than $ 5 trillion in May, up 50% from February. The total monetary base and total dollars that central banks around the world keep in their reserves were $ 8 trillion in May, a record high.
While the pandemic seems to prove that the dollar has not lost its status of reserve currency, the financial markets are questioning its credibility.
“The rise in the price of gold,” said Naokazu Koshimizu, an economist at Nomura Securities, “happens because the value of the dollar is falling.”
As dollar supply swells, the value of the greenback is in decline in the foreign exchange market. The effective dollar exchange rate index has been in retreat since July, reaching its lowest point since May 2018 and plunging depths 30% lower than where it was in March this year.
Because of the pandemic, financial markets expect governments and central banks to continue their fiscal expansion and monetary policy for some time to come. In the US, investors are looking ahead and taking note of heavy public spending and mandatory spending that will require the Fed to continue to buy massive amounts of Treasury because it is accelerating its efforts for dollar printing.
As a result, the yield on 10-year Treasuries is now at 0.5%, the lowest yield of the notes ever, and gold rallies.
Meanwhile, the spread of the coronavirus in parts of Asia and Europe, leading to a sluggish world economy and making Fed operations more important than ever.
Will his aggressive quantitative easing hurt the credibility of the dollar? This is what investors and analysts are thinking now. Takehiro Noguchi, an economist at the Mizuho Research Institute, says financial markets are sending a message: Risk is lurking around the corner.
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