Gold is one of the most interesting investment choices, especially in times of economic recession, hyperinflation and general social crisis as is currently the case due to the Covid-19 pandemic around the globe.
In March, gold price experienced the biggest rise for the past seven years, mainly for two reasons:
- All the world’s central banks have engaged in a very large volume of transactions through implemented monetary policies to support their economies.
- Due to the Covid-19 pandemic and to protect the health of workers many gold mining mines worldwide are now closed.
by Thanos S. Chonthrogiannis
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These two reasons create a framework characterised by simultaneous increased demand for gold and a decrease in gold supply. This is the explanation for the huge increase in the price of gold for this month.
The purchase of gold is accompanied by a gold possession certificate which gold is stored in special vaults in London, New York, Singapore, Toronto and Zurich.
The main drawback in terms of gold is that the quantities traded either digitally or with paper holding certificates are often multiples from the actual physical quantity. If you don’t own it, it’s like you don’t have it, a lot of people argue.
Assuming that a significant proportion of gold holders want to acquire it in physical form (regardless of the cost of guarding and transporting it) using the gold hold certificates they have in their hands to date, it is certain that there will be a huge issue of meeting the demand for gold.
Either some will not be able to take him into their own hands, or gold price will soar to levels that so far seem unthinkable. Maybe, of course, both at the same time.
In the following Figure 1 we see the trajectory of the price of WTI Crude Oil $ per barrel and Gold $ per oz respectively for the period (01 January – 01 April 2020).
Figure 1: The trajectory (gold and oil prices respectively) is inversely proportional and since the trajectory of the oil price usually moves in contrast to the growth rate of the global economy shows us why demand for gold is increasing in times of crisis. In the above Figure 1 we note that on 18 March 2020 the price of gold collapsed due to the announcement of quarantine and lockdown measures by most EU member countries.
In reverse proportion to the current supply and demand framework governing the price of gold applies to the price of oil. This is caused by the “war” between Russia and Saudi Arabia with ever-increasing oil production aimed at undersourping the market shares held by US companies producing oil from shale rocks.
At the same time, the lockdown imposed on most the world’s developed economies to deal with the Covid-19 pandemic has caused global oil demand to collapse. The dramatic increase in global oil supply with the simultaneous global collapse in demand for oil is driving the price of oil to historic lows.
The fact of having a spread in gold prices for the same amount between two different locations on the planet (e.g. in New York (USA) the ounce of gold is sold more expensively than London (UK)) is proof of the cost measure for converting gold futures contracts into physical form.
Major trading and investment banks in both the US and UK currently have more gold in their stores to meet the growing demand for its physical delivery.
The fact that many gold mining mines in the world are closed can certainly pose a problem in the supply chain for gold. But this does not change the fact that gold is an investment haven for the citizens of this world over time.
