Fear has its price as gold nears US$2,000 in uncertain world

Gold is king. Since the first outbreak of Covid-19 at the end of last year, the precious metal has been on a tear. Now, it is set to breach the psychological level of US$2,000 per ounce, making it one of the best asset classes during the global pandemic. It has matched its reputation as a safe haven, and then some.
But how safe is it, really? If it continues its ascent, it will probably mean the world is going to pieces. This is because gold has always been viewed as a safety blanket against disaster, whether natural, economic, political, or all of the above. Fear has always been associated with the hoarding of gold, including jewellery.
Certainly, the world today doesn’t look safe any more. We in Hong Kong have long considered our land the place of safety and fortune, in a world full of deadly conflicts and uncertainties. Well, look what has happened to us!
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In the worst-case scenario, your gold may not be enough to save you from Armageddon. But it probably will not come to that, fingers crossed. Gold prices will fall back, just like they did after the worst phase of the global financial crisis more than a decade ago. The world will recover from the brink.
First, an obvious reason for the rise of gold: it’s priced in US dollars, and the greenback has hit a two-year low. There is a view, now increasingly common, that the US dollar is starting a long-term decline against global currencies. And that scenario encourages people to find safe havens, including gold.
The trillion-dollar question is: to what extent will the Covid-19 stimulus programmes spark inflation? We know the answer from goldbugs, but from the experience of the last financial crisis, stimulus does not necessarily lead to inflation when an economy is in a depressed state.
But as in the last financial crisis, there is now a global flood of liquidity, estimated at between US$6 trillion and US$8 trillion, thanks not least to highly accommodating central banks, including the People’s Bank of China.
Bond yields and interest rates are at record lows, and the Covid-19 pandemic promises to stymie the recovery of every major economy, with the possible exception of China.
But even the mainland has to make do with minimal growth. So long as the key central banks continue to keep rates low, capital will need higher returns elsewhere, and gold still provides a safe place to park your money.
If you are a pessimist, you may want to buy more, even if gold goes over US$2,000. If you are an optimist, you may pause or even do the opposite. But if you are a realist, you probably want to maintain a portion of your portfolio for the yellow metal.
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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.
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