What the rise in gold tells us

For those keeping up with investment news recently, it will have been hard to miss the rise in the price of gold. It’s been on an impressive trajectory for months, coinciding with the pandemic and the economic issues faced along the way.

What the rise in gold tells us

It’s not just gold that tends to do well in a recession, other precious metals and oil, for example, tend to fare quite well as investors often retreat to safety whilst waiting to see what happens in the markets.

There are also some stocks and shares that can be considered somewhat safe, such as banking shares. In comparison, however, they offer nothing like the relative stability of precious metals.

For anybody who keeps tabs on the price of gold, it’s often the case that investors can smell trouble when the prices begin to rise over a sustained period, and this can also spook the market from time to time.

According to Investopedia, “The price of gold is generally inversely related to the value of the United States dollar because the metal is dollar-denominated. All else being equal, a stronger U.S. dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive the price of gold higher through increasing demand (because more gold can be purchased when the dollar is weaker).

As a result, gold is often seen as a hedge against inflation. Inflation is when prices rise, and by the same token prices rise as the value of the dollar falls. As inflation ratchets up, so too does the price of gold.”

Sharp rise in price

As the BBC reported, gold recently reached a new record, surpassing USD $2,000 per ounce for the first time. They put this down mainly to the increase in the money supply from central banks across the world.

An increase in money supply can also follow a rise in interest and inflation, and so gold is seen as a good insurance policy against inflation and interest increases, and tends to see gold prices increase as the main indices in the UK and US drop.

According to Bank of America, governments around the world have already announced approximately USD $20tn worth of stimulus to combat the economic impact of the pandemic.

Property

What does all this tell us about property? Well we already know that investors are looking for safe havens, and it doesn’t get much safer than UK property, and so this is likely to drive demand higher.

Further to that, prices returned to impressive growth in July, indicating that investment activity has increased already.

Couple that with the government’s recent announcement that they have temporarily stopped stamp duty, and it’s looking very much like UK property, similar to gold, is becoming a favoured safe haven investment for many across Europe, who are seeing strong and stable returns at a time when they are at a premium.

It wouldn’t be shocking to see prices and rents grow even further towards the end of the year.


Preston Guide vertical - April 2019

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