Gold: Best Investment This Year

Gold has been an undisputed leader this week. The XAU/USD pair updated its all-time highs, reaching $1981 per ounce, and then corrected below $ 1950. Over the past 30 days, gold increased in price by more than 10%, and since the beginning of the year, it added 30% in value, which makes this precious metal one of the best investments in 2020.

Gold keeps getting support from vague global economic prospects, falling interest rates, escalating tensions between the US and China, and the weakening US dollar. It’s worth noting that the plunging dollar makes the precious metals (denominated in the US currency) more accessible to buyers. The dollar index, which tracks the value of the USD again six other currencies, runs the risk of showing the biggest monthly decline in the last ten years at the end of July. All because of expectations of new stimulus measures from the Federal Reserve.

Uncertainty about the next stimulus package exerts a significant drag on the dollar, as Democrats and Republicans are struggling to come to a consensus. Some Senate Republicans have opposed their own party's proposal for a $ 1 trillion stimulus package, while Democrats propose much more generous support, including an additional $ 600 per week in unemployment benefits. Let us remind you that the previous fiscal support expires at the end of July. So the problem is that new incentives need to be agreed by the end of the month so that the economy doesn't end up on the “fiscal edge of the cliff”. In the future, the uncontrolled printing of money may lead to further expansion of the Fed's balance sheet, causing inflationary risks and even bigger dollar losses.

Investor concerns about the global economic outlook are exacerbated by the rise in the number of reported coronavirus cases in the United States and other countries. The number of infected people worldwide has already exceeded 16 million, and the US authorities are urging residents to follow social distancing rules hoping to prevent the spread of the pandemic. In the current situation, smart investors are buying gold as a safe-haven asset.

The rise in gold is also facilitated by the decline in the US Treasury's real yield. We are talking about bond yields adjusted for inflation, which are falling amid interest rate cuts by major central banks and the introduction of stimulus measures designed to mitigate the economic impact of the pandemic. The 10-year TIPS yield fell to an all-time low of -0.90% last week. Market participants admit that it could dip as low as -1% if the recent surge of coronavirus in the US prompts the Federal Reserve to revise its key interest rate minimums. However, even investors already have to pay for the fact that they own bonds. As a result, gold is becoming a more attractive safe-haven asset and a cheaper way to hedge against inflationary risks. According to Citibank analysts', gold has all chances to test $ 2,300 level in the next 12 months.