Giles Coghlan, chief currency analyst at HYCM, analyses the surge in gold prices and how the COVID-19 pandemic may continue to influence its fortunes.
In the future, investors and traders will regularly look to 2020 to understand just how different stocks, bonds, currencies, commodities and investment securities react in times of prolonged market volatility. What makes this year stand out from other volatile periods (the 2008 global recession immediately comes to mind) is twofold.
The first has to do with the COVID-19 pandemic being a health crisis shrouded in uncertainty. We simply do not know when or how the virus will cease to dominate government agendas, business activities and consumer behaviours. As a result, traders and investors cannot predict with any certainty what the coming months, weeks, or even days will bring. This makes managing an investment portfolio particularly difficult, forcing investors to contend with something beyond their control.
The second has to do with the long-term implications of COVID-19 on the global economy. There are concerns that the coronavirus will trigger a reverse in globalisation; for example, new popularity for protectionist policies to safeguard the future of national industries and a contraction in global supply chains. It is too early to tell whether this is likely to be the case, but either way, we must acknowledge the enduring influence COVID-19 will have on businesses, government and investor actions for many years to come.
A critical crossroads
At the moment, we have reached what I consider to be a critical juncture. We have weathered the initial outbreak of cases, and countries are now relaxing social distancing measures as a result. In reaction to this, the financial markets have been posting positive figures. On 20 July, the Euro hit its highest level against the US dollar since March – a consequence of EU leaders negotiating a €750 billion recovery plan. In response to this plan, the Dow Jones Industrial Average rose 1.03% and the S&P 500 regained positive territory for the first time since 8 June.
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While this is welcoming news, such market movements only reveal part of a bigger story. The stock markets may be making gains, but so has the price of gold. What makes this particularly interesting is the fact that investors tend to rally to this so-called safe-haven asset in times of uncertainty. Gold prices are currently trading at over $1,800 per ounce – a major milestone that has not occurred since 2011. What’s more, the gold price has gone up by around 19% in 2020 alone, and commentators are hopeful that gold will surpass $2,000 per ounce by the end of the year – a record breaking achievement.
Such projections have left many investors scratching their heads. Have we really entered a period of market recovery or are we witnessing the calm before the storm – a second outbreak of cases or significant economic downturn that will send shockwaves across the major indices?
The gold rush is here
Put simply, gold prices are ideally positioned to increase over the coming months. This is not due to an increase in consumer demand for the precious metal, but rather a reflection of investors using gold to hedge against market uncertainty by improving their risk-adjusted returns and also having access to a liquid asset able to hold its value in times of volatility.
It seems reasonable to assume gold will surpass its all-time high of $1,920 recorded in September 2011 in the coming months. This will be a defining movement, and could spur on the buyer demand needed to break the $2,000 per ounce barrier by the end of the year. Of course, such growth will by no means be a straight-line trajectory.
The reality is that the price of gold, like all assets, will be influenced by geopolitical events and the COVID-19 pandemic. However, signs at the moment seem to suggest that underlying market uncertainty is encouraging investors to flock to safe haven assets, with gold featuring at the top of their lists.
The reality is that the price of gold, like all assets, will be influenced by geopolitical events and the COVID-19 pandemic.
When is the right time to buy gold?
For those looking to buy gold, a useful reference tool is the Volatility Index, or VIX. By analysing future risk and investor behaviour, the VIX provides a 30-day projection of the expected volatility likely to be experienced by the major markets – a vital instrument in today’s climate.
Based on performances in the past, a drop in the VIX should be followed by a rise in gold prices. Conversely, a rise in the VIX will normally occur prior to gold prices dropping. That’s why investors looking to buy gold need to watch the performance of the VIX carefully to ensure they enter the market at the right moment.
Overall, investors should not rush to gold simply because it is rising in price. Any trade or investment decision needs to be influenced by a bigger strategy and lead to an ultimate goal. A common mistake is investors acting hastily and making rash decisions, instead of taking a step back and thinking how they can best take advantage of the market while at the same time not losing sight of their ultimate financial objectives. By understanding this simple point, investors and traders will be best positioned to make effective use of future gold price movements.
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Hann-Ju Ho, senior economist for Lloyds Bank Commercial Banking, looks back at the history of globalisation to understand why it was on the agenda in Davos.
Luminaries from across the political and business world gathered last week for the World Economic Forum (WEF) Annual Meeting in Davos, Switzerland,
Although concerns about near-term global economic growth and trade tensions dominated conversations, the official theme of this year’s forum was ‘Globalisation 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution’.
But what does this mean and why is it expected to be important for the future?
To understand what Globalisation 4.0 means, it’s useful to look back on the previous waves and consider how they have shaped the world we live in.
Technology driving trade
Globalisation 1.0 refers to the rapid growth in world trade, mainly during the nineteenth century.
It was driven by innovations in transport and communications, including the railways, steamships and the electric telegraph.
The subsequent reduction in the cost of global transport enabled the separation of production and consumption across international borders, making previously exotic products like tea, sugar and cotton readily available and affordable in markets like the UK for the first time.
Globalisation surged again after the Second World War – dubbed Globalisation 2.0.
Driven by greater international cooperation, the post-war period saw less protectionism and a rapid growth in world trade, at least in western economies.
Enabling offshoring
The third wave of globalisation is thought to have started around 1990.
Further advances in technology, including the spread of the internet, made it easier for different stages of production to be based in various locations across the globe, leading to the emergence of modern supply chains.
This enabled firms to further cut the cost of producing products and delivering services by moving their operations to cheaper locations, known as offshoring.
However, it’s also likely have contributed towards rising disenchantment, particularly where people in more advanced economies feel that they have not reaped the rewards.
The next wave, dubbed Globalisation 4.0, is set to be driven by the Fourth Industrial Revolution, which is happening right now.
The development of advanced technologies like artificial intelligence, big data, nanotechnology, the internet of things, 3D printing and autonomous vehicles all have the potential to significantly impact global productivity.
Opportunity and inequality
Unlike the previous waves, which have mainly affected goods-producing sectors, Globalisation 4.0 is predicted to have a much greater impact on services.
Unlike the previous waves, which have mainly affected goods-producing sectors, Globalisation 4.0 is predicted to have a much greater impact on services.
And we live in an increasingly connected world, so the speed of its adoption may also be faster than in previous waves.
Attendees at Davos not only discussed the opportunities that Globalisation 4.0 is expected to create, such as increased productivity, but also considered the growing evidence of a backlash against globalisation.
The WEF could be regarded as the ultimate representation of globalisation, so it is no surprise that meeting the challenges this latest wave of economic change brings for individuals and society were high up on the delegates’ agenda.
Is globalised trade in reverse? Is protectionism on the rise with the potential of a spreading trade war? These are questions at the top of many business leaders’ minds. The answer to both these questions is yes, and business models are going to have to change as a result. Dr Joe Zammit-Lucia, co-author of ‘Backlash: Saving Globalisation from Itself’, explains for Finance Monthly.
WTO figures already show a significant slowdown in the growth of international trade as a percentage of GDP. We are still only at the early stages, but a trade war and a stalling of globalized trade is almost inevitable.
This first part of the 21st century has seen many shifts from the post-war global world order that we had all become used to and on which the trans-national business model has been built. These changes are significant, encompassing political, cultural and economic shifts that have upended old assumptions.
To cite but a few examples, global governance structures (WTO, IMF, World Bank, etc) were previously seen as fair arbiters of the global order. Now their governance structures are seen by developing countries as dominated by the West and by the developed world as no longer serving their interests.
‘World trade produces net benefits for all’ was the 20th century mantra. Now it is clear that such benefits are very unevenly distributed with consequent economic, social and political implications. The free movement of global capital was seen as a vital fuel for growth and development. Now it is seen as potentially destabilizing, a system for hiding large amounts of illicit money, and a facilitator of tax arbitrage.
Low labour costs were seen as the competitive advantage of developing countries. Now they are seen as the basis of ‘unfair competition.’ Persistent trade imbalances were dismissed. Now we understand their corrosive effects on deficit countries.
In an information driven world, privacy and national security issues affect trade – from the manufacturing of routers to the security of data platforms, to building self-driving cars. For instance, Qi Lu of the Chinese tech company Baidu explains: “The days of building a vehicle in one place and it runs everywhere are over. Because a vehicle that can move by itself by definition it is a weapon.
But maybe most important is the major geopolitical shift. The post-war world order was characterized by Western dominance and overseen by the hegemonic power of the US. Now we have three more or less equally potent trading blocs – the US, China and its sphere of influence, and the European Union. Economists have known for decades that in such a structure, competition between blocs was much more likely than co-operation.
Trans-national business has played a role in these changes. A meaningful proportion of the US trade deficit comes not from ‘Chinese goods’ but from American goods that are being manufactured in China (the computer I am writing this on, for example). Businesses have long engaged in arbitrage between countries in investment, jobs and taxes, nurturing, over time, what has turned out to be a political time-bomb.
Neither can business leaders be blamed for such behaviour. They were doing their job: optimizing their business models. But times have changed. The rules of world trade need overhaul. And business models will have to change with them.
Some business leaders are already taking action. “The days of outsourcing are declining. Chasing the lowest labor costs is yesterday’s model” says Jeff Immelt of GE. “Now we have a strategy of localization and regionalization” states Inge Thulin of 3M.
It is also worth bearing in mind that the trade agreements that we have all become used to were developed in a world of trading largely in goods. They are poorly suited to trade in services, digital commerce and large financial flows.
It is tempting to dismiss talk of trade wars as a Trump phenomenon. Much bombast, little meaningful action, and something that will soon pass. That would be to misunderstand the slow but sure tectonic shifts – political, cultural and economic – that are happening.
How individual businesses react, or, preferably, pre-empt these shifts will determine their future performance. And they will determine whether the political consequences of their actions will, over time, smooth things out or make them worse.
Simonetta Sommaruga, President of the Swiss Confederation and Minister of Justice and Police
Today’s global context is one of uncertainty, said Simonetta Sommaruga, President of the Swiss Confederation and Minister of Justice and Police, talking at the World Economic Forum Annual Meeting in Davos, Switzerland, yesterday.
“Overall, globalisation has led to greater prosperity and reduced poverty, but that is not the case everywhere,” she said. “It would be a dangerous mistake to ignore the uncertainty felt by many people,” she added.
Ms Sommaruga pointed to the rise of nationalist and populist parties in many countries in Europe that are critical of globalisation, reject immigration and incite scepticism towards the European Union. She called on business people and politicians to accept responsibility and address the uncertainties created by today’s global economy.
“Are we creating an economic environment in which only high performers working under constant pressure can prevail?” she asked. “Competition is growing for the highly developed economies too. In more and more countries, workers are still paid low wages but now offer highly skilled labour.”
This means that even leading economies can remain successful only if they are prepared to continuously make structural changes. “Structural change in itself is not a bad thing, but it produces winners and losers. This is something we cannot accept,” the President said.
Uncertainty has fuelled the rise of nationalist conservative parties in Europe, parties that invoke a nation’s sovereignty and a native country symbolising familiarity and safety. This describes an ideal past that never was, she added.
Sommaruga noted that business leaders have avoided assuming the responsibility for answering questions on the inequitable distribution of the benefits of globalisation for far too long. “We need business people who want to earn money but who also want something more,” she said. “We need business people who want to give others a chance; employers who set benchmarks in terms of profit and of corporate culture. We also need commodities groups that prohibit all forms of forced labour and exploitation, and that recognise the rights of others.”
The President also called on policy-makers to put in place – and enforce – a sound framework based on the rule of law, legal certainty, no corruption and protection of human rights and social justice. “These elements are key to a healthy economic and social order. This requires determination, clear values and steadfastness,” she added. “Nothing has greater value in politics than credibility.”
