Where is the gold price going
Where is the gold price going after the corona crisis?
Even in the current crisis, you can rely on gold
The status of gold as a safe haven was confirmed in the Corona crisis. It is true that the prices of the yellow precious metal also fell significantly at the beginning of the sell-off of all assets on the financial markets from the end of February to mid-March.
Afterwards, however, the gold price recovered in a V-shape and is currently close to its highs in euros again.
Compared to other asset classes such as B. stocks, REITs, corporate bonds and even government bonds, the precious metal is also very stable in US dollars.
Gold this year in all currencies the world outperforms most other forms of investment, according to the World Gold Council.
For a short time there were even panicked purchases on the futures markets, so that the prices between future metal (future gold contracts) and ongoing quotations (spot price) drifted apart by up to 50 dollars. The premiums for gold coins also reached historic highs.
While the cash gold price in euros has increased by 11 percent since the beginning of the year, common coins such as For example, the Krugerrand, which weighs 1 ounce (31.1 g), increased its value by 23 percent over the same period - that is, by more than double. (As of April 8th, 2020)
In mid-March, the demand for coins and bars increased almost twenty-fold compared to the previous year.
The motives for buying are wide-ranging
The motivations for buying gold during the crisis go well beyond the direct consequences of the virus pandemic. Investors are worried about the economic side effects of the pandemic around. Even before the outbreak of the Covid 19 epidemic, the world was more heavily indebted than ever before in peacetime. The Institute of International Finance (IIF) estimates total global debt at 322 percent of global gross domestic product.
This initial situation now threatens to result in debt and banking crises in the wake of the pandemic. The desperate countermeasures of monetary policy also harbor the risk of rising inflation in the medium term.
Countries like Venezuela, Argentina, Chile and the Ukraine were already in financial difficulties before the current crisis. In Argentina is default now officially.
Turkey, Brazil and South Africa also found themselves in difficult economic waters. The economic consequences of the containment measures against the spread of the SARS-CoV-2 virus now threaten to lead to the outbreak of debt crises at the level of companies and states worldwide.
Corporate debt has grown to a staggering $ 20 trillion. That is also a record. But private households are also massively threatened with over-indebtedness. A domino effect threatens like the one during the financial crisis of 2008 ff., In which the banks severely reduced their lending due to bad debts and got themselves into financial difficulties.
Even during the global financial crisis, gold had proven itself brilliantly as a safe haven for wealth against systemic risks in the banking sector and against impending government bankruptcies.
However, the level of debt is even more pronounced today in absolute terms and relative to economic output.
The effects of the crisis make gold ownership essential
Only after the corona crisis has subsided will you be able to see the full extent of the economic damage. But some developments are already visible:
The indebtedness of the particularly badly affected countries is skyrocketing. In countries such as Italy, Spain and the USA in particular, the debt ratios will skyrocket by double digits.
The Government deficit In the United States, based on gross domestic product, five percent in the fiscal year 2018/20129 (until September) in the current fiscal year 2019/2020 to 13 percent explode.
For total debt, this means a debt ratio measured by GDP of 120 percent and thus close to the level of Italy with currently 133 percent and even higher than that of Portugal with 118 percent.
But even in the southern European countries, the debt ratios will continue to rise sharply due to the stagnation of large parts of the economy.
The same applies to the indebtedness of companies, whose balance sheets were already weakened by high liabilities before the current crisis. In the USA, a wave of the quality gradations of corporate loans is already rolling through the rating agencies.
In the final quarter of 2019, only 8.5 billion bonds were downgraded from good credit quality (investment grade) to bad credit quality (junk bonds / high yields). In the first quarter of 2020, these downgrades had already affected corporate bonds worth $ 148.8 billion - a 17-fold increase.
In March of this year alone, according to Deutsche Bank, US debts of 90 billion US dollars fell into junk status. That is a new world record in such a short time and significantly more than during the financial crisis.
The long-term consequences of the corona crisis
Since experience has shown that pandemics run in several waves and currently no vaccines or active ingredients have been approved against the corona virus, a second, albeit significantly less pronounced, corona wave can be expected in autumn.
According to the Robert Koch Institute (RKI), the first wave could gradually ebb by the beginning of May. Economic activity could then slowly start up again. A good part of investment, consumption and services will then be made up for. For example, a rush to hairdressers and hardware stores can be expected.
Other services such as B. taxi rides, restaurant or sauna visits cannot be made up for. It is not yet possible to quantify how many companies will have to withdraw from their respective markets. Some entrepreneurs will also use the crisis to undertake closures or job cuts that are already planned.
Experience has shown that unemployment rises very quickly and sharply in crises, but it only declines at a disproportionately low rate in the subsequent recovery phase. This is also due to the fact that many companies are seizing the opportunity and implementing restructuring measures or promoting the degree of automation. A phenomenon that could already be observed in the aftermath of the global financial crisis.
In addition, in view of a possible second corona wave and the experience of the recent disaster for travelers or trips that have already been booked but not taking place, tourism, for example, will lead to reluctance to make new bookings.
Most serious, however, is the risk of an outbreak of national debt crises á la 2012, such as in Greece or Cyprus. Only this time, significantly more countries with significantly larger debt volumes are threatened.
In the case of the euro zone, this could even put the common currency, the euro, in serious danger.
The same applies to companies at risk of insolvency, which are currently able to keep their heads above water thanks to aid loans, but for whom the additional debt from aid loans after the crisis could finally break their balance sheet necks.
Many factors speak for a further increase in gold prices
In order to do justice to the upheavals in the economy, the loss of sales and profits, the endangerment of jobs, the dwindling tax revenues, the aid programs worth billions and the associated additional debt burden, the monetary politicians in the central banks have taken unprecedented measures, which are also not without consequences will remain and bring with them the risk of downstream debt crises and inflation surges.
This year already have 94 central banks in the world interest rates lowered and only four central banks raised interest rates. This means that interest rates in the major currency areas around the world are zero or even below.
This is also promoted by the trend towards debt and reducing the propensity to save.
After the global financial crisis, with a few exceptions (Germany), the debt in most countries was not reduced again, but on the contrary rose dynamically in the last decade despite the long economic upturn. This development can also be assumed this time. For monetary policy, this means that in order to maintain the debt sustainability of governments, companies, banks and private households, interest rates must remain at the extremely low level that has now been reached.
Parallel to the de facto abolition of the interest rate, the central banks have created almost 10 trillion US dollars in new liquidity worldwide and made it available to economic agents as loans or unconditional transfer payments via the state.
Without this money from the digital printing press, the trillion-dollar aid packages for the economy and citizens would not have been financially viable by the states.
When the fog clears after the first wave of the pandemic has subsided, historically high debt ratios, record high unemployment and massive corporate bankruptcies will emerge.
The central banks will be permanently forced to support over-indebted states, banks that are confronted with massive loan defaults, companies and private households and to protect them from a debt collapse.
The central banks can only guarantee this support for the economy through the de facto abolition of the cost of capital (interest) and through the unlimited purchase of debt securities and assets of all kinds. The US Federal Reserve is already on this path and is working closely with the US Treasury Department to buy unlimited amounts of national debt and to extend loans (including in the form of mortgage loans) to banks, companies of all sizes and individuals.
This makes the central bank the creditor of last instance.
In the history of the uncovered monetary system, this was always the last stage before veritable currency crises and increased inflation occurred in the following years.
General inflation will break out when the aid measures take effect, the economy revives and, on the other hand, because of the high level of total debt, interest rates cannot be raised again in order to counteract inflation.
This perspective, consisting of low interest rates and a rapidly increasing amount of money, supplemented by the increasing risk of debt crises, make the scarce precious metal, which has an intrinsic value, i.e. cannot go bankrupt Asset protection indispensable.
Gold is also recognized worldwide and is also highly valued by central banks as a reserve currency.
Gold will therefore continue its upward trend, which began in winter 2015, well beyond the acute phase of the pandemic due to the long-term economic consequences.
The potential for demand is enormous, since gold as a component in asset portfolios is still heavily underrepresented in historical comparison. While the rates were around 20 percent in the 1970s, according to the latest data from the World Gold Council, they were only 3.2 percent in 2018.
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