Coronavirus recovery: gold price spike shows real fear of inflation

Name: Six months after WHO declared Covid-19 a public health emergency, what more do we know now?
Uploaded: 2020-08-04T09:00:05.000Z
Duration: 7 min 54 s
Description: Six months after WHO declared Covid-19 a public health emergency, what more do we know now?

No doubt the uncertainty surrounding the pandemic is a key driver of gold demand, the precious metal having been a safe-haven asset for millennia

However, it is also possible central bank policy responses to the pandemic, while perfectly logical now, will have undesirable consequences in time

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An employee displays gold bars at a Korea Gold Exchange shop in Seoul on July 30. Virus uncertainty and China-US tensions have sent gold prices soaring nearly 30 per cent this year. Photo: AFP

Neal Kimberley

Published: 5:00pm, 4 Aug 2020Updated: 10:18pm, 4 Aug 2020

“Inflation is always and everywhere a monetary phenomenon,” the Nobel Prize-winning economist Milton Friedman wrote in 1970. With central banks firing up the printing presses in their response to the Covid-19 pandemic, global money supply is increasing rapidly and markets have noticed.

As there’s always a risk such monetary largesse results in price inflation, markets are factoring that into their calculations. The price of gold has soared, hitting an all-time high last week of US$1,980.57 an ounce.

That represented a nearly 30 per cent increase in the gold price in 2020. The rise has occurred despite clear evidence coronavirus-related economic lockdowns in countries such as China and India – both key gold consumers – has hit retail demand for gold. Gold consumption in China, which is the world’s largest producer and user of the metal, contracted by 38 per cent in the first half of 2020, according to the China Gold Association.

Gold usage in jewellery, which makes up some two-thirds of gold used in China, shrank 42 per cent in the first half of the year. Consumer expenditure on gold coins and bars, more generally for collection or investment purposes, plummeted by 32 per cent. Even so, the gold price keeps rising.

No doubt the uncertainty surrounding the pandemic is a key driver of gold demand, the precious metal having been a safe-haven asset for millennia. However, there is also the possibility that central bank policy responses to the pandemic, while perfectly logical in the current context, will have consequences that will appear undesirable in time.

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Six months after WHO declared Covid-19 a public health emergency, what more do we know now?

Yield suppression by banks in their attempts to keep the supply of credit inexpensive and plentiful during the pandemic have made it more economical to hold non-yielding assets such as precious metals. When suppression drives nominal yields below existing inflation rates and puts real yields into negative territory – as is presently the case in the United States – the argument for holding gold and other precious metals becomes easier to construct.