The COVID-19 pandemic had triggered an unprecedented response from public authorities, as they try to prop up economic activity via fiscal or monetary measures. The United States alone is projected to have $4 trillion in budget deficit in 2020 and the Federal Reserve had already increased its balance sheet to $6.5 trillion, with projection above $10 trillion in the next two years.
Such measures could have ripple effects across the world if the economic contraction will turn out to be severe. At the same time, currency debasement will intervene, which is where gold enters the ring.
A reliable store hold of wealth?
We’ve already covered gold CFD shortly in a period article related to commodities, but given how conditions had changed since then, a more in-depth approach is required. For centuries gold had been at the core of the financial system and although we have a fiat monetary system since 1971, investors around the world are still considering gold a reliable store hold of wealth and a protection against the diminishing purchasing power of money.
An ounce of gold is currently trading at $1,720 and the price continues to pick up steam. As long as monetary and fiscal interventions will remain aggressive, gold is expected to continue on its way up, but hiccups along the way could show up.
Gold during an economic downturn
The experience of the 2008 financial crisis has thought us that gold could under perform when economic conditions are scarce. That happens because during an economic downturn there is a liquidity crunch which makes investors sell assets to cover their needs. At the same time, some countries can sell some of their gold to finance budget deficits, putting pressure on the gold price. Even though the current momentum in gold seems rock-solid, building an optimal CFD portfolio will be important to not be caught by surprise.
Luckily, traders can profit from the gold price in many ways. ETF CFDs based on gold, mining companies, or even physical gold are some of their alternatives. Before we conclude, gold traders should also pay close attention to the relationship between the US dollar and gold. It’s true that we had a negative correlation so far, but given the dollar is the global reserve currency, we could find ourselves in a situation where gold and the dollar go up at the same time. As strange as this sounds, the market could behave strangely in difficult conditions like the current ones.