We are seeing the highest gold prices in eight years because of the COVID-19 pandemic. You may look at this news and wonder what gold has to do with the Coronavirus. Gold is the ultimate safe repository of money. Gold backs even the currencies that we use on a daily basis. Hence, people flock to investing in gold in times of uncertainty like the current times. Due to this, gold prices are at the highest level in eight years. Traders and investors alike are opting for gold and gold investments to preserve their wealth.
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Reasons behind Highest Gold Prices in Eight Years
The market was expected to go down over fears of new Coronavirus clusters. Places like China, Germany, the Caribbean, Latin America and even the US are seeing a resurgence in cases. But the market is largely unaffected by these concerns. However, traders and investors are worried if you look at the incidents on June 24. Gold is now at $1,776 for an ounce and may even hit $1,800 per ounce if these trends continue. This huge spike in gold prices is a clear indication that traders are getting jittery.
Current Situation in the World
These highest ever gold prices are due to another gold rush that has come up. The German DAX fell by over 2% despite the Ifo business survey indicating that market recovery is underway. The survey beat the street estimates so that should’ve sent the DAX higher. The fall is due to growing fears over another spike of new infections in Germany. In the North Rhine-Westphalia state of Germany, there is now a lockdown surrounding a meat factory with a cluster of cases.
US stock futures signal the same sentiment. With rising infections in states like Arizona, Florida and California, investors are worried. The US’s top expert in infectious diseases Dr. Anthony Fauci echoes this sentiment. He says that we need to control the number of cases by the fall or things will really get out of hand.
The condition in the US will impact the global economy. As the world economies slowly reopen, they will be wary of the rising number of cases. Some countries may ban Americans from entering their country. The EU is one such place that is recommending such measures. Banning the travel of Americans due to rising COVID-19 cases is a security measure. But it will have a negative economic impact.
Investors may tread carefully, but that doesn’t mean that the stock market is tumbling. The stocks don’t display any concrete signs of downside as of now. On 23rd June, S&P 500 closed after a 40% upside from its slump on 23rd March. The chief economist of Commerzbank is Jörg Krämer. He says that business survey done by Germany pertaining to the business climate doesn’t reflect the true picture. He thinks that the recovery will be moderate at best during the second half of 2020.
US Shale Industry is having a crisis
The 15th Birthday of the US Shale industry is coming at a precarious point. Shale oil has made the US one of the world’s largest producers of crude oil. However, more production doesn’t mean more profit. The shale oil industry has failed to bring in consistent profits despite more production. The pandemic has made this situation worse by reducing the demand for oil. With states and countries in lockdown, crude oil prices have fallen to an all-time low. With limited economic recovery, the demand isn’t back to normal. It is expected that this subdued demand is going to persist for a while.
These low crude oil prices are a warning bell. Such low prices will lead to mounting debt for the crude oil industry. Moreover, there will be a capital flight out of the fossil fuel industry. This in turn, will set off a chain reaction of bankruptcies and selloffs. Thus, a fall in crude oil prices and demand affects the whole economy and not just the fossil fuel industry.
30% of the American shale oil operators appear insolvent already due to $35 per barrel oil values. Deloitte’s study reveals that the discounted imminent value of such operators is lesser than their overall debt. Current American oil price is now fluctuating between $40 and $39 per barrel.
Reasons for this Crisis
The US shale oil industry has historically received a lot of support. Low-interest rates have helped the US shale businesses in the past. Thus, the US shale oil industry had access to easy and cheap capital from all investors. These investors were willing to pump in money looking at the industry’s growth potential. This heavy investment facilitated technological interventions. Thus, production went up drastically and the oil companies became more efficient. However, this did not correspond with higher earnings and cash liquidity or free flow. Deloitte’s report shows that since 2010 the US shale oil industry has used up $300 billion.
The onslaught by the Coronavirus is hitting this industry hard. With the oil prices falling and subdued demand, oil companies now are slashing the values of their portfolios. This spike in write-downs is surely going to impact the industry negatively.
Pound as a developing market currency
The UK’s pound is a strong currency that is amongst the highest traded currencies of the world. However, investors are contemplating as to where it stands in the financial markets. It has seen erratic price fluctuations and a persistent weakness in recent times. Experts think that the pound is now reflecting the mood of the British economy which is shrinking and small.
The pound is 16% lower vs the dollar since the Brexit declaration in 2016. Since March, the pound has become increasingly volatile. Only the Brazilian Real is more unstable than the pound as of now. The second half of 2020 may not go well for the pound either, looking at the UK’s funding gap. This gap is an inevitable consequence of the COVID-19 pandemic.
Financial Markets around the world see volatile times ahead. However, this shouldn’t be feared as eventually, things will get back to normal after a few quarters.