Gold Price Spurred by Low Interest Rates and COVID-19

(16 August 2020) Gold—the traditional safe haven of investors—has experienced a steady price increase over the past few months amid expectations of deeper recession in the world economy coupled with falling interest yielding asset classes, a weaker US dollar, and slowing real estate markets. Gold prices increased 38 percent YoY to above $2,050 per ounce in early August amid concerns about a resurgence of COVID-19 and deeper recession predicted by the IMF in its June World Economic Outlook.

• The IMF’s Outlook indicates that the global economy is likely to shrink by 4.94 percent, advanced economies by 8 percent, and emerging markets by 3 percent in 2020.
• Aggressive policy rate cuts by Central Banks in response to the global economic deterioration have forced long term interest rates to historically low levels, including yields on 10-year bonds.
• Though equity markets around the world have rebounded from their March lows, the low interest rate environment and uncertainties around COVID-19 have boosted gold prices as investors turn to gold as a hedge against low returns on interest bearing assets. Gold ETFs flows increased by 21 percent in first half of 2020, according World Gold Council. Moreover, production of gold fell 6 percent to 2,192 tonnes as mine production and recycling were reduced by COVID-19 induced lockdowns.