Metal protection: why the worsening situation in the global economy caused a record increase in gold prices

On Thursday, June 25, world gold prices show mixed dynamics at international trading. At the beginning of the day, the cost of precious metals increased by 0.24%, to $ 1779 per troy ounce, after which it was slightly adjusted to $ 1770. This is evidenced by data from the Comex Commodity Exchange.

Quotes stabilize after they reached their maximum level over the past eight and a half years. So, on Wednesday, the price of gold in the moment rose to $ 1796 per troy ounce. The last time a similar indicator could be observed back in November 2011.

In many ways, the record rise in price of precious metals is associated with the accelerated spread of coronavirus in the world. This point of view in an interview with RT was expressed by the head of the laboratory of the Institute of Applied Economic Research, RANEPA Alexander Abramov. According to him, traditionally, during the growth of uncertainty in the global economy, investors begin to actively buy gold as a reliable means to save money.

“To some extent, gold is a mirror of market sentiment. Last days investors are worried about the onset of the second wave of coronavirus. The intensification of the pandemic could aggravate the already difficult situation in the global economy, ”Abramov explained.

According to Johns Hopkins University, since the beginning of summer, the number of coronavirus infected COVID-19 in the world has grown by more than 3 million and currently exceeds 9.4 million. Against this background, the International Monetary Fund (IMF) has worsened the forecast for a global economy decline. According to the organization’s estimates, in 2020 the volume of world GDP may decrease by 5.9%. Earlier, IMF specialists expected a decrease of 3%.

“According to the fund, the largest drop in GDP will occur in the USA (by 8%) and the eurozone (by 10.2%), where the risk of a pandemic is growing. In Germany, Italy, Portugal, the number of infected and the number of new foci of coronavirus is increasing. Moreover, any new quarantine restrictions will automatically lead to a more significant drop in the economies of these countries, ”explained Artyom Deev, head of the AMarkets analytical department, to RT.

It is noteworthy that the global economic recovery in 2021 may turn out to be more restrained than previously expected. According to the IMF forecast, global GDP growth will be 5.4% instead of 5.8%.

“Now, among experts, the point of view has been established that the economy will not recover quickly. In many countries, isolation is much slower than anticipated. Accordingly, this will affect the restoration of such sectors of the economy as the service sector or transport, ”said Alexander Abramov.

• US Federal Reserve Building
• © Kevin Lamarque / Reuters

Additionally, the demand for gold stimulate the actions of the US Federal Reserve. In late March, the US Federal Reserve announced an unprecedented expansion of the quantitative easing program. The regulator began to print dollars and buy bonds in the stock market in an unlimited volume. Such a policy should lead to an increase in the money supply in the economy and help to increase the GDP growth rate. A similar policy was launched by the European Central Bank (ECB).

At the same time, the measures of the Federal Reserve and the ECB run the risk of weakening the dollar and the euro in the long run. Thus, investors began to invest more actively in gold, the value of which does not depend on the currencies of the United States and Europe.

“The largest central banks say they are expanding the repurchase of assets from the market, pumping liquidity into the financial system. This strengthens inflation expectations and directs investors to search for methods to preserve the value of capital. Against this background, gold is seen as an instrument of protection against inflation, ”EXANTE managing partner Alexei Kirienko told RT.

Under current conditions, RT experts surveyed highly appreciate the likelihood of further gold appreciation in the coming months. According to the forecast of Artyom Deyev, the cost of the precious metal may drop for a while, after which it will overcome the psychological mark of $ 1800, and by the end of the year will approach the highest level in history of $ 2000.

Durable stock

According to experts, the rise in price of gold can positively affect international reserves in Russia. According to the Central Bank, over the past year, the share of precious metals in the country's gold and foreign exchange reserves has grown from about 18% to 22%. By the beginning of summer, the corresponding volume exceeded $ 127 billion. 

“Russia is one of the six countries in terms of gold and foreign exchange reserves. At the beginning of the year, gold reserves amounted to 2270.56 tons. Naturally, the rise in price of gold affects the increase in the country's financial reserves, ”said Yuri Mazur, head of the CEX.IO Broker data analysis department, in a conversation with RT.

An increase in the volume of reserves in monetary terms allows directing additional funds to support the economy and national currencies. About this RT told the stock market expert “BCS Broker” Dmitry Puchkaryov.

“Gold and foreign exchange reserves are the state’s safety margin. They can be used to cover the budget deficit, balance of payments, to maintain the national currency or repay external debt. The more reserves, the more stable the economy, ”concluded Puchkaryov.