Gold as a Safe Haven Amid COVID-19 Fear... Gold Prices Continue Their Rally

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] As the fear of the novel coronavirus infection (COVID-19) stirs anxiety in the financial markets, the price of gold, a representative safe-haven asset, continues its upward rally by hitting an all-time high.

According to the Korea Exchange on the 24th, the price of 1g of gold spot in the KRX gold market closed at 62,860 KRW on the 21st, up 2.21% (1,360 KRW) from the previous trading day. It marked the highest price for two consecutive days, with the gold price on the 20th (61,500 KRW) breaking the all-time high for the first time in about six months since August 13 last year (61,300 KRW). The gold price has risen 4.9% just this month.

Gold prices are also showing strength in overseas commodity markets. According to Bloomberg, on the 21st, the gold price on the New York Commodity Exchange (COMEX) closed at 1,648.80 USD per ounce (oz), up 1.75% (28.30 USD) from the previous trading day. This closing price is the highest in about seven years since February 8, 2013 (1,666.00 USD).

As gold prices continue their record-breaking streak, the returns of public funds investing in gold are also rising. According to the fund rating company FnGuide’s aggregation of returns for funds with assets under management of over 1 billion KRW, as of the 21st, the recent one-month return of 12 domestic gold funds was 3.56%, and the return for this year was 5.37%. This is a remarkable performance compared to domestic equity funds (-2.88%) which recorded negative returns over the past month, and bond funds (0.60%) which only saw slight gains.

Related exchange-traded products (ETPs) also showed an upward trend. Shinhan Leverage Gold Futures ETN (9.3%), KINDEX Gold Futures Leverage (Synthetic H) (7.8%), and Samsung Leverage Gold Futures ETN (H) (6.9%) recorded returns exceeding 5% during the week of February 17-21. KODEX Gold Futures (H) (3.5%), TIGER Gold Futures (H) (3.4%), and Shinhan Gold Futures ETN (H) (3.5%) also showed gains of around 3%. During the same period, the KOSPI fell by 3.6%.

The COVID-19 crisis, which has yet to subside, has acted as a factor driving demand for gold as a safe-haven asset amid financial market anxiety. Soohyun Kim, a researcher at Daishin Securities, analyzed, "In a prolonged low-growth and low-inflation phase, the inflow of safe-haven demand due to the COVID-19 crisis and Middle East geopolitical risks is driving the rise in gold prices."

There is a view that gold prices will not easily fall even if the COVID-19 situation calms down in the future. This is because the accommodative monetary policy stance of global central banks is expected to strengthen. Researcher Kim explained, "Although the preference for safe-haven assets may weaken, accommodative monetary policies and fiscal expansion policies aimed at recovering from the damage caused by COVID-19 could lead to a rise in the price of real assets such as gold."

Jinyoung Choi, a researcher at eBest Investment & Securities, also diagnosed, "Considering the slow recovery pace of oil demand and the base level of oil prices, the recovery of expected inflation in the first half of this year will be limited, so the need for a base interest rate cut will inevitably continue to be raised. In conclusion, the direction of gold prices this year should be weighted toward an increase."

China’s proactive economic stimulus policies are also evaluated positively for physical gold demand. This is because there is a possibility that demand for Chinese jewelry, physical gold bars, and coins, which have shrunk due to the COVID-19 crisis, will increase. As of last year, China’s demand for jewelry and physical gold exceeded 30% of global demand.