What record gold prices reveal about the global economy

Gold prices have soared to record highs as nervous investors look for ways to protect their wealth. 

The rare metal has long been a popular defence during times of crisis, but some economists say this gold rush is different. 

Upward momentum in recent days has pushed a troy ounce of gold (31.3 grams) to a record high $US1945 ($2723.39) – far higher than the previous record of $US1920 ($1811.30) set in September 2011. 

The spot price of gold has now increased 38 per cent since the start of the year, and industry insiders say the current swing could take it to $US2000 ($2800.40) by year’s end.

Gold prices.

The price of gold (in USD) over the past decade. Source:

Those gains have come from nervous investors buying up gold to protect their wealth, according to eToro market analyst Josh Gilbert.

Gold is considered a ‘safe haven’ asset, meaning it typically holds its value during crises better than other assets like stocks or cash.

And with the US dollar currently at its lowest level since June 2018, and fears the coronavirus could lead to further restrictions and lockdowns, gold is now seen as a way for investors to protect themselves from stock market sell-offs, or further falls in their cash holdings.

Mr Gilbert said other safe haven assets (in particular silver) have also seen skyrocketing demand in the past month.

“Silver has seen a 57 per cent gain this year and 45 per cent gain alone this month,” Mr Gilbert said.

“In the last few days, we have seen cryptocurrency assets become bullish, with Bitcoin being labelled as ‘digital gold’ by some as it has gained more than 18 per cent this week alone and 55 per cent year to date.”

Not simply a ‘red flag’

Although demand for gold is typically driven by scared investors trying to shield themselves from adverse economic conditions, AMP Capital chief economist Shane Oliver said other factors are playing a role, as well. 

“Some might see this as a red flag in terms of inflation. When gold goes up, it can be a sign that people are seeking a safe haven, particularly as a hedge against inflation,” he said.

“That may be a factor in pushing the gold price up, and in fact it almost certainly is, but there’s a bunch of other factors at play as well.

This time it’s a little bit complicated.”

For one thing, lower interest rates have reduced the ‘opportunity cost‘ of holding on to gold.  

The rare metal does not produce a return the way that cash stored in an interest-accruing bank account does, so investors who hold it miss out on returns generated by interest.

But because interest rates are at record lows, the lost returns are quite small, making gold more attractive, according to Dr Oliver.

Another major driver is the falling value of the US dollar. As all commodities except for wool are priced in US currency, falls in its value typically push commodity prices higher.

“It’s a common thing – why is the Australian dollar at 71 US cents and gold at record highs? Because the US dollar has come down,” Dr Oliver said.

“And a fall in the US dollar can actually be a positive sign.’’

That’s because, like gold, the greenback is considered a safe haven asset.

Investors park their money in US dollars during crises because the American economy is less susceptible to the fluctuations of other currencies such as the Australian dollar.

When they take their money out, that is usually a sign that government stimulus policies outside North America are working and economic activity is starting to tick up again. 

“The US dollar tends to come down when there’s more confidence around, and it’s been falling since late March,” he said.

“The US dollar normally goes down when things are improving, and that’s consistent with the Aussie dollar going up – that usually only happens when times are better.”

In March, when the coronavirus pandemic was at its peak, the Australian dollar fell to roughly 55 US cents, but has since climbed back to approximately 71 US cents.

Topics: Economy
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