Gold rallied to a new record high of $1,944 per ounce on Monday, breaching its previous all-time high of $1,921 per ounce that it hit in 2011. The US dollar meanwhile fell to multi-year lows.
Gold, viewed as a safe haven, has been among the best performing asset class this year and is up 27% year to date. In comparison, the S&P 500 Index is trading flat for the year while the Nasdaq 100 Index, the best performing major equity index globally, is up 20% over the period.
Inflows into gold ETFs in the first half of 2020 totalled $39.5bn, beating the previous record of $23bn in the full year 2016. The SPDR Gold Trust ETF, which invests in physical gold, is up 25.0% so far in 2020 while VanEck Vectors Gold Miners ETF that invests in gold mining companies is up almost 43% over the period.
The macro outlook supports a gold rally. US-China tensions are at their worst level in decades. Tensions flared further over the weekend after the US arrested a Chinese researcher hiding in China’s consulate in San Francisco, accusing her of hiding her identity as a member of China’s military. This was preceded by tit-for-tat consulate closures by China and the US.
“The China hawks in the White House are . . . doing all they can to burn bridges to reach a point of no return in US-China relations to ensure there can be no detente-style backsliding under a potential Biden administration,” said Michael Every, global strategist at Rabobank
Most analysts are positive on gold’s upward trend as it tends to outperform in periods of economic uncertainty brought on by the pandemic. Rising fiscal deficits, low interest rates, geopolitical turmoil — almost all the macro indicators are positive for gold prices.
Last month, Bank of America forecast an all-time high for gold prices while Goldman Sachs raised its 12-month price target to $2,000 per ounce.
Meanwhile, the US dollar came under pressure on Monday and the dollar index that measures the value of the US dollar against six major currencies including the Euro, pound, and yen, fell to its lowest level since June 2018. In June, leading economist Stephen Roach warned that the US dollar would plunge 35% against other major currencies by the end of 2021.
“Clearly the US dollar is really being questioned very openly. The question is: If you’re negative the dollar what are you positive on?” said Robert Rennie, global head of market strategy at Westpac. He added: “Gold is the one asset market that is really reflecting heightened risks from rising geopolitical tensions.”
Qi Gao, a currency strategist at Scotiabank sees US-China tensions as weighing heavy on the US dollar and expects the greenback to weaken further in the coming weeks.
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