People are buying up gold as an investment, and trying to stave off inflation as the pandemic wreaks havoc on economies.
The uncertainty amid the novel coronavirus pandemic has caused a surge in the price of gold, reaching more than $1,700 per ounce (33.1 grammes) which at the start of the year hovered around $1,500.
Many countries are desperately trying to apply measures that can stem the economic bleeding from the pandemic lockdown, including stimulus packages or bailouts for businesses.
Amid the uncertainty, people have started to buy gold to avoid the negative effects of inflation or because they see it as a sound financial investment during a crisis.
According to a recent Bank of America Corporation (BofA) report ‘The Fed can’t print gold’, the price of one ounce of gold will hit $3,000 in 18 months.
This estimate is 56 percent higher than gold’s historic record in September 2011 when the price peaked at $1,921.
Analysts in the report said: “As economic output contracts sharply, fiscal outlays surge, and central bank balance sheets double, fiat currencies could come under pressure.”
Taking all these reasons into consideration “investors will aim for gold” the report said.
On the other hand, BofA expects the price of gold to be at $1,695 on average for this year. For 2021, the average will be $2,063.
According to BofA analysts, the demand for jewellery is set to plunge as consumers try to save cash. Weakened purchasing power in India and China will continue to put pressure on the metal even when the global economy has recovered from the pandemic.
“But beyond traditional gold supply and demand fundamentals, financial repression is back on an extraordinary scale,” the report added.
Why gold is seen as a safe bet
There are several reasons that people invest in gold as an inflation hedge to an investment medium during crisis times.
From the Egyptians to the Inca civilisation, gold has been seen as an extremely valuable commodity.
Gold differs from other metals in terms of durability over time which means other metals prone to corrode over time whereas gold is one of the least reactive metals.
Gold became universally accepted as a medium of payment throughout history and is seen as a favourable hedge against inflation. It is perceived as a good investment against a declining currency.
For example, the value of gold has increased nearly seven times since the beginning of the Millenium.
Moreover the supply of gold, which comes from mining, has levelled off since 2016 which also increases its price.