On the 5th local time, after breaking through the US$2,000 per ounce mark on the previous trading day, the most active December gold futures price on the New York Mercantile Exchange’s gold futures market reached a new high, rising by US$28.3 from the previous trading day and closing at The ounce was US$2049.3, an increase of 1.4%.
As a precious metal, gold’s relatively stable scarcity properties give it the characteristics of high value retention. Therefore, with precious metals such as silver and palladium, gold has become a well-known hedging asset. Generally speaking, when the price of gold goes up, it is often accompanied by a slump or even a sharp drop in the financial market with high returns.
Gold is the simple substance form of the chemical element gold (chemical element symbol Au). It has stable chemical properties and often exists as a simple substance in nature. As a precious metal, gold is soft and golden in color. It is often used as a special currency for reserves and investment. It is also an important material in the jewelry industry, electronics industry, modern communications, aerospace industry and other sectors.
But the paradox is that while the price of gold is rising steadily, the world’s major stock markets have also rebounded from the trough in March. Markets and research institutions generally believe that the recent increase in gold prices is a special product of the fiscal and monetary policies of many central banks in the face of the epidemic. The growth of gold prices has exceeded the function of gold as a hedging tool. Some analysts pointed out that the rapid increase in gold prices is mainly affected by higher inflation expectations, the new crown epidemic intensified the risk of global economic recession and geopolitical factors.
Large-scale interest rate cuts and bond issuance in response to the epidemic from the perspective of gold’s hedging function, the current status of the stock market’s basic recovery and the high price of gold should be contradictory. However, the recent increase in the price of gold is precisely due to the fiscal and monetary policies of many central banks after the massive decline in the stock market caused by the impact of the new crown epidemic. It is the fiscal and monetary policies of many central banks that have caused a large amount of money to flow into the market, which has led to the devaluation of sovereign currencies such as the US dollar, lower interest rates on national debt, and higher inflation expectations.
The June “Global Financial Stability Report” issued by the International Monetary Fund showed that since March 18, the US stock market has experienced a low point after its fourth circuit break in two weeks. However, due to the Federal Reserve’s release of credit arrangements during the crisis on March 23, the acquisition of stocks and corporate assets in the form of national debt, and the unlimited quantitative easing policy, the US stock market has risen accordingly.
Devaluation of sovereign currencies such as the U.S. dollar
In response to the economic impact of the epidemic, some central banks have taken unprecedented measures to rescue the market. The purpose of these measures is to rescue the market on the one hand, and to improve liquidity on the other. (Liquidity refers to the amount of money placed in the economic system. Excess liquidity refers to the excessive amount of money placed. These excess funds need to find a way out for investment, so there is a phenomenon of investment/economic overheating, and the risk of inflation On the other hand, there is a shortage of liquidity, which will lead to deflation.) As a landmark measure to increase liquidity-interest rate cuts and over-issuance of currencies-have become a common idea adopted by many central banks, which inevitably leads to a decline in the currency index of some countries . It is reported that in response to the impact of the epidemic, central banks in more than 40 countries and regions have cut interest rates nearly 70 times.
IMF: The world’s worst economic recession since the Great Depression
The IMF lowered its forecast for global economic growth this year to -4.9%. This is a decrease of nearly two percentage points from three months ago, and the following countries are expected to experience a deep recession-the United States (-8.0%), Japan (-5.8%), the United Kingdom (-10.2%), Germany (-7.8%) , France (-12.5%), Italy and Spain (-12.8%).
The International Monetary Fund also warned that this will be the world’s worst economic recession since the Great Depression. Since the root cause of the economic recession lies in the control of the epidemic in many countries, the global economic situation in the future is not optimistic before the current situation where specific drugs and vaccines have been developed.
From January to May 2020 during the epidemic, the consumer confidence index (CCI) of the 19 countries in the Eurozone and the United States has been relatively sluggish and has continued to decline. The outlook, the future development of unemployment and savings has shown an increasingly negative attitude. Beginning in May, the Eurozone consumer confidence index began to rebound, and the decline in the US consumer confidence index also slowed down relatively, but it remained at a relatively low level. (Image source: Organization for Economic Cooperation and Development)
According to the forecast of the International Monetary Fund, before the new crown epidemic takes a turn, if the central banks of many countries stop supporting and boost market sentiment, the current stock market rebound will not continue. On the other hand, it is precisely because of the continued liquidity support provided by the central bank that many stock companies and corporate bond markets have expanded, which may lead to repricing of risky assets, thereby increasing financial pressure in the context of economic recession.