In the summer of 2020, news outlets started reporting about the huge increase in the price of gold. In August 2020, the spot price of gold hit an all-time high of over $2,075 per troy ounce. This eclipsed the previous high set in August of 2011 of approximately $1,900. In comparison, the averages for 2018 and 2019 were $1,269.93 and $1,393.34, respectively. Let’s take a closer look at why gold became so valuable so fast.
How Inflation and Stock Prices Affect Gold Prices
Usually, gold prices are affected by inflation, monetary policy, and the stock market. If stock market prices are falling or inflation is on the rise, there is a higher demand for gold. When the value of the United States dollar drops, investors buy gold for its safe haven status and universal and international value. In an interesting twist, stock prices did not drop before the 2020 spike, nor did inflation increase. However, the Federal Reserve went into overdrive in an attempt to fight the effects of COVID-19 and increased their asset purchases at an unprecedented rate, which resulted in their balance sheet increasing from approximately $4.1 trillion to $7.4 trillion. Never in the history of the Federal Reserve have we seen such an incredible increase in the monetary base in such a short period of time. For comparison purposes, it took nearly 100 years from the establishment of the Federal Reserve in 1913 to equal the size of the asset base that took a mere 12 months to reach. This increase flooded the economy with liquidity, which resulted in a weakening of the dollar and an increase in the value of all precious metals; most notably gold.
The Role of International Relations in the 2020 Spike
Economists also contribute the rise in the price of gold in part to international tensions, particularly between the U.S. and China. In July of 2020, the Trump administration asked China to close their consulate in Houston, and China responded by closing the U.S. consulate in Chengdu. With the future of the trade relationship between the U.S. and China up in the air, including the increased possibility of war, investors sought gold out of concern for the future stability of the U.S. economy.
COVID-19 and Uncertainty as Factors
The COVID-19 pandemic also played a significant role in the price of gold due to the global uncertainty about the illness and how it would affect international government operations. After the initial lockdown in many countries early in 2020, investors began to anticipate winter lockdowns during the summer months. Along with high coronavirus rates came high unemployment, decreased commerce, and a rise in economic aid.
Even though the circumstances that caused a spike in gold in 2020 were not typical, all increases in the price of gold have one thing in common: uncertainty. When investors start to worry about the state of the economy, they often run to gold in a flight to quality or as a safe haven investment. With the price of gold at approximately $1,800 in July of 2021, much of uncertainty seems to have dwindled. However, it seems clear that the gold spike of 2020 has had lasting effects.