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What Drives the Gold Rush?

The price of gold recorded a new all-time high this week, rising above $1,981/oz. Naturally, the rise brought a lot of attention and coverage from the financial media. Moreover, the surge higher triggered a bid in silver too.  But what triggered the recent gold rush, and why now?

Long-term gold bulls do not understand why market participants are surprised by the rise in gold. After all, in times of crisis, gold acts as a safe-have class.

However, that is not always the case. Throughout history, examples existed when the price of gold was actually depressed during economic recessions.

What Next for the Price of Gold?

The monthly change in ETF holdings reveal a strong interest in gold since 2020 began. Paper gold (ETFs, demand from the investment community) interest rose dramatically, and, unsurprisingly, the Fed has something to do with it as interest rates reached historical lows in March.

As such moves into physically-backed ETFs continue at a strong pace, as seen above, but, at the same time, consumer demand is weak. Jewelry demand, for instance, was the weakest on record during the first quarter of 2020. Naturally, households switched to liquidity and saved more than before the crisis.

Since gold is perceived by many investors as a strategic asset, it acts as a source or returns and, in dire times, of liquidity. So far, during the coronavirus crisis, gold proved, once again, why it is worth keeping it in a portfolio.

Moving forward, the rest of the year and beyond proves interesting for gold. As it became clear now that the pandemic depressed real yield, it remains unclear for how long this phenomenon persists. The more it does, the more consistent the bid behind the gold price is.

For clues about where the price of gold might head next, the ETF flows are the best way to interpret the market’s positioning. However, monetary policy changes and the direction of the USD have an equal role for the price of gold when denominated in USD.

If the USD continues on the same path, then the bullish trend on gold has just begun. If USD liquidity shrinks again, as it did at the start of the COVID-19 crisis, expect for gold to give up some of its gains.

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