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Can the gold price rally be sustained?

Shrea Paul
Shrea Paul
Precious Metals Analyst, Refinitiv Metals Research

August’s Market Voice analyzes the reasons behind gold’s impressive rally in recent weeks, which saw the dollar price break through the $2,000/oz mark in early August, and the prospects for a sustained rally.


  1. To combat the negative economic impact of COVID-19, central banks and governments have initiated massive stimulus programs. These actions, along with heightened uncertainty, have seen investors flee to safe haven assets such as gold, which hit a fresh record high in early August.
  2. Economic and political developments in the U.S. and geopolitical tensions between the U.S. and China helped to support the rally in the gold price.
  3. The Metals Research team at Refinitiv believes that the gold price will remain supported by unprecedented stimulus measures, low to negative interest rates, the global economic downturn, and ongoing geopolitical tensions.

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The COVID-19 pandemic has powered the rally in gold as investors flee to safe havens.

To alleviate the economic turmoil, central banks have injected stimulus to resuscitate domestic economies. As a result, we have seen a further reduction in interest rates and currency devaluation in some cases. The U.S. dollar weakness was particularly supportive for gold.

In addition, the gold price has been further boosted by simmering tensions between the U.S. and China.

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Gold price moves through $2,000/oz mark

Gold has registered an increase of 27 percent so far this year; its best performance on record. In July alone, the gold price surged 12 percent to hit new record levels.

The momentum has carried into August, with gold soaring above the never-seen-before levels of $2,000/oz at the start of the month. However, 11 August witnessed the sharpest sell-off of the last seven years, raising questions if gold’s recent rally has come to a halt or if it is just a temporary setback.

The dive came amid rising U.S. treasury yields and reports that Russia has granted regulatory approvals to a vaccine to combat COVID-19.

However, the sell-off had been widely expected as profit-taking at such price levels was inevitable.

That said, the prospects for gold look promising, although profit-taking could lead to a period of consolidation in the near term.

Watch: Refinitiv Perspectives LIVE — Precious Metals COVID-19 Impact: One to rule them all?

COVID-19 and the global economy

The extent of the blow caused by COVID-19 on the global economy is also being reflected in data across the world.

U.S. GDP contracted by an alarming 32.9 percent in the April-June quarter. According to the latest data from the United Kingdom, its economy dived into a deep recession, with a 20.4 percent quarter-on-quarter slump in its GDP in the second quarter.

Meanwhile, data released by the U.S. Department of Labor showed that the weekly jobless claims for the week ended 25 July were at 1.4 million. Expectations of an economic relief bill to soothe the U.S. economy has also kept investors on the tenterhooks with Democrats and Republicans at an impasse

Further stimulus measures will be a positive for gold. However, equities continue to be supported by the huge amount of liquidity that has entered the market as a result of the stimulus measures, but if this support falters we could see an accelerated run on gold.

Figure 1: U.S. quarterly GDP growth (percent)

US Quarterly GDP Growth (percent). Gold price breaks $2,000 per ounce mark
Source: Eikon – Click on the chart to request a free trial

Financial markets could be disrupted, while political developments in the U.S. in the run up to the presidential election could lend further support to gold.

The presidential election is now fewer than 90 days away and President Trump recently suggested delaying it. This has raised concerns that he will seek to circumvent voting in a contest where he currently trails his opponent by double digits.

On the geopolitical front, relations between the U.S. and China have worsened over the past month.

Trump has indicated that he may ban China-owned application TikTok from the U.S., and the U.S. has recently shut down the Chinese consulate in Houston. In a tit-for-tat response, China ordered the closure of a U.S. consulate in the south-western city of Chengdu.

Figure 2: Gold spot price

Figure 2: Gold spot price. Gold price breaks $2,000 per ounce mark
Source: Eikon – Click on the chart to request a free trial

Prospects for a sustained gold price rally

The price of gold in the short- to-medium term will be influenced by COVID-19 developments worldwide and fresh economic data.

Investors will be monitoring how quickly the world’s largest economy can return to an expansion mode and how soon an economic relief bill will be finalized.

Against an uncertain backdrop, we expect gold to be supported at current levels, with a potential of further price increases, particularly if the COVID-19 situation worsens in the coming months, with the possibility of a second wave and signs of an even deeper economic downturn.

Having said that, following such a rapid increase in the gold price in recent weeks, we may well see a retracement and a period of consolidation in the short term, although the overall picture remains positive for the yellow metal.

While high prices in other various currencies have dried up physical demand for the metal, gold investment continues to be driven by the economic turmoil and the health crisis.

There is currently no physical demand in Asia, even after the more recent price drop. China’s discount has increased further, while Indian buyers are likely to wait until a new import tax benchmark price is set in the coming days. The period between July and September is deemed to be a lean quarter for India, and, in addition, Indian consumers are not comfortable buying gold during periods of high volatility in prices.

Meanwhile, institutional investors are turning towards COMEX and ETPs. The SPDR holdings, the world’s largest ETF, hit nearly 1,268 tonnes in early August — the highest level in over eight years — before easing a bit in recent days.

We retain the view that monetary and fiscal policies around the world will continue to be supportive for gold. Bond yields and short-term interest rates are likely to stay low in nominal terms and negative in real terms for the foreseeable future.

Figure 3: U.S. 10-yr Treasury yield vs Gold price

Figure 3: U.S. 10-yr Treasury yield vs Gold price. Can the gold price rally be sustained?
Source: Eikon – Click on the chart to request a free trial

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