COVID-19 has wreaked havoc on the global economy, but gold, silver and bitcoin are benefiting from the financial uncertainty that’s triggered an investor rush to safe havens. Prices for precious metals set new records over summer, and it’s likely the rally will stretch through the rest of the year.
Economic turmoil caused by the pandemic has had sweeping and severe impacts on financial markets across the world, including stock, bond and commodity markets. That volatility, along with the falling dollar and fears of inflation due to massive spending on COVID-19 relief, are fueling the surge in prices of precious metals and even copper.
Panic has long been the best incitement to precious metals. Anxious investors looking for stability and certainty will naturally turn to the tangible value of gold and silver. So it’s no surprise that safe-haven bullion has surged almost 30% this year, underpinned by low interest rates globally and widespread stimulus from central banks.
The US economy suffered its biggest blow since the Great Depression in the second quarter as the crisis shattered consumer and business spending, wiping out more than five years of growth.
At the same time, the US dollar has taken a massive hit, tumbling 4% in July in its worst month since 2010. The dollar has reclaimed nominal value since and it’s still down about 9% from its March highs amid fears that the pandemic will crimp US growth more than other economies.
Like many commodities, gold is priced in dollars and becomes more affordable to foreign buyers when the US currency falls.
Gold is “the only safe haven that provides safety, that is a haven against inflation and global fiat currency debasement,” says Euro Pacific Capital chief executive Peter Schiff.
The dollar slid to a two-year low a few months ago – while gold set new records – after the Federal Reserve left interest rates unchanged at near zero and ramped up emergency measures to boost dollar liquidity. Fed Chairman Jerome Powell said back in June that he was not even “thinking about thinking about” raising rates.
The Fed’s strategy to tackle the COVID-19 crisis is similar to what it did to fight the 2008-2009 recession: interest rate cuts, forward guidance about rates and large-scale asset purchases known as quantitative easing. Indeed, some of the policy changes made in response to the 2008 crisis – such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and the Troubled Asset Relief Program – mean the overall financial system is in better shape this time around.
Still, the economic chaos, coupled with the uncertain political situation in the US and concerns that a resurgence in new coronavirus cases will threaten the nascent recovery in the world’s biggest economy, are fueling investors’ exodus to safe havens.
The economic data have been just as devastating on the other side of the pond. France’s economy shrank 13.8% in the second quarter, mirroring drops in Spain (18.5%), Portugal (14.1%) and Italy (12.4%). Gross domestic product slid 12.1% in the eurozone and 11.9% across the 27-nation European Union.
The International Monetary Fund expects global output to slide 4.9% this year, followed by 5.4% growth in 2021 – the worst recession in 90 years. That implies a cumulative loss to the world’s economy over 2020 and 2021 of more than $12 trillion from the crisis.
Meanwhile, gold prices continue to tick higher, exceeding $2,000 an ounce for the first time ever in early August. Bank of American analysts expect gold to reach $3,000 an ounce in the coming 18 months, underpinned by higher inflation rather than already low interest rates.
Silver is on course for a monthly rise of 33%, the largest jump on records going back to 1982. But the “poor man’s gold” is not even halfway to its all-time high and is still considered undervalued by many analysts.
With the dollar’s role as safe haven in question, investors are turning to the Japanese yen and Swiss franc for safety. The Swiss currency is trading at five-year high levels against the dollar, while the yen strengthened to a six-month high.
Inflation and weak national currencies, combined with zero percent (or even negative) interest rates, are also spurring investors toward bitcoin. Trading volume of the cryptocurrency is climbing, especially in places with hyperinflation, such as Venezuela and Argentina. The overall market capitalization of cryptocurrencies topped $350 billion last week, with about two-thirds of that in bitcoin.
Some Wall Street businesses are jumping on the bandwagon and shifting into gold and bitcoin.
While Goldman Sachs has dismissed cryptocurrencies as not being an asset class, JPMorgan recently welcomed its first crypto exchange customers. At the same time, Standard Chartered is aiming to be in the crypto custody business by the end of the year. This may predict a future where Wall Street opens up to new and alternative assets, with investors such as Paul Tudor Jones citing his purchase of bitcoin to hedge against the continuing increase in money printing by central banks.
Recently, the more technologically advanced PayPal signaled a move into the crypto trading business, sending a letter to the European Commission confirming that it’s developing cryptocurrency capabilities. Visa and Mastercard also announced plans to extend their cryptocurrency offerings, with Mastercard’s executive vice president Raj Dhamodharan saying: “The cryptocurrency market continues to mature.”
Political powerbroker and startup investor Joel Zamel also supports the shift into bitcoin and gold given the increasing government stimulus in the United States – and the Federal Reserve’s promise to buy all bonds if need be. Zamel notes that the US dollar will continue to weaken under these conditions which will drive up demand not just for bitcoin, but for more technologically robust blockchain projects such as DeFI (decentralized finance). Zamel’s investment drives also support bitcoin mining operations across North America in a bid to shift the mining monopoly away from China. While many are skeptical that the market’s COVID-19 bull run may come to an abrupt end, Zamel is already preparing for the next era of financial products and also operates a community of cryptocurrency thought leaders.
Quantum Economics founder Mati Greenspan attributes this more neutral stance to “central bank actions over the past few years and the deliberate debasement of fiat currency.”
On the big tech side, Facebook’s Libra cryptocurrency project has stalled due to government pushback as it poses a threat to dollar’s reign as the global reserve currency. Considering the recent congressional hearings on big tech, it seems unlikely they will go forward with the project.
However, Facebook, Amazon and Google are now offering services using blockchain, highlighting a shift from their recent visible push against all things linked to cryptocurrencies.