An Era of Persistent Uncertainty... Attention Needed on Gold Investment

Economic Recovery Slows Due to COVID-19... Uncertainty Continues
Need to Focus on Gold Investment with High Stability↑

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minwoo Lee] As the novel coronavirus infection (COVID-19) spreads, there are forecasts that a global economic recession is inevitable and structural changes may occur. In this era where such uncertainty becomes a constant, the appeal of gold, which has stability, is highlighted.

On the 11th, Kyuyoun Jeon, a researcher at Hana Financial Investment, emphasized the need to pay attention to gold if the global economic recovery is delayed more than expected due to COVID-19 and real interest rates remain low for a prolonged period.

Researcher Jeon explained, "According to a paper by the Federal Reserve Bank of San Francisco that studied 15 major cases from the 14th century onward to analyze the medium- to long-term effects of pandemics, the spread of infectious diseases increases precautionary savings and lowers real interest rates for decades. If uncertainty in financial markets continues, global economic recovery proceeds more slowly than expected, and an environment where real interest rates remain low for a long time unfolds, the appeal of gold, whose essence is stability, will rise."

In fact, after the market shock caused by COVID-19 in the second quarter, risk assets showed a rapid recovery while gold prices also rose. Amid a rally in risk assets driven by large-scale liquidity supply from central banks, investors increased their investment in gold, a safe asset, to balance their portfolios in preparation for uncertainty.

Researcher Jeon said, "Since volatility-increasing factors such as the possibility of a second wave of COVID-19 and the U.S. presidential election persist, the preference for safe assets is expected to continue for the time being. In fact, demand for investment gold through exchange-traded funds (ETFs) is sharply increasing, and the amount of gold held in ETFs is at a historic high," he analyzed.

He forecasted that the gold price range in the second half of the year will be around $1,650 to $1,900 per troy ounce (approximately 1.98 million to 2.28 million KRW). One troy ounce is about 31 grams (g), which corresponds to 8.294 times the domestic unit of 1 don. The low interest rate trend and the weak U.S. dollar also support the rise in gold prices.

Researcher Jeon stated, "Gold prices have a strong inverse correlation with interest rates, and since it will take a long time for the global economy to fully recover, central banks are highly likely to maintain a low interest rate policy. The U.S. dollar is expected to show a weak trend in the second half of the year, and since gold is traded in U.S. dollars, a decline in the dollar's value will increase gold's relative appeal." He added, "Although the suspension of gold purchases by the Russian central bank may slow the pace of gold purchases by emerging market central banks, it will not have a significant impact on the direction of gold prices."