The Price of Gold Continues to Soar

The price of gold continues to reach for new highs. The precious metal closed on May 18 at $1733, down slightly from Friday’s close of $1742. It is not just the month of May that has seen the price of gold go up.

The commodity has traded at fresh highs every month of 2020, and it appears as if it will continue to exhibit bullish behavior as the Chairman of the Fed, Jerome Powell, warns of a protracted recovery. Chairman Powell was quoted as saying that, in the event of a second wave of coronavirus infections, the disruption in economic activity could stretch as far as the end of 2021.

During uncertain times, gold has always been the “go-to” place to park money. The metal’s strong performance during 2020 is in stark contrast to the broader market. The price of gold has risen close to 15 percent during this year. The Dow is down 15 percent in the same period, and the S&P 500 has fallen close to 10 percent. Nasdaq has bucked the trend. The tech-stock weighted index is up over two percent on the year.

Monetary Policy Has Pushed Gold Higher

The monetary policies enacted by the Federal Reserve are also responsible in part for the soaring price of gold. Interest rates are zero or close to it, and they are expected to remain that way for the foreseeable future. Chairman Powell has suggested that further stimulus may be in the offing. Should this be the case, the U.S. dollar is likely to weaken and boost inflationary pressures. Both gold and Bitcoin bulls are of the same opinion.

As of today, no one knows when the COVID-19 pandemic will wane. Nor does anyone know the effects the virus will have on the global economy. Those in the know are saying that continued uncertainty, along with corporate earnings that are expected to be dismal for what is left of the year, will continue to boost gold. At the moment, gold is a very attractive asset, more so than long-term bonds. Long-term bond yields have plunged as well due to the coronavirus. The U.S. 10 year bond is currently standing at a miniscule 0.7 percent.

There Are Risks of Going Too Far, Too Fast

This time presents many unknowns. There may be a potential downside for gold in 2020.

If the recent positive activity in the stock markets continues, the price of gold could suffer. There is hope that the global economy, along with corporate profits, will turn around quicker than expected. There is another fact to be considered. Gold is more than just an investment. Gold is a physical good that is used in electronics and is a key component of luxury goods such as jewelry. Compared to a year ago, the demand for gold destined for use in jewelry fell by almost 40 percent, while gold demand from tech companies fell 8 percent.

A relatively strong dollar may limit gold’s upside. Gold prices have historically gone up when the value of the dollar has fallen. However, the U.S. dollar index has gone up by about 4 percent during 2020. Although this is the case, some experts think the dollar will suffer as the Federal Reserve keeps printing money and the government continues spending on bailout programs.