This post was written with contributions from the SPDR Gold Strategy Team: George Milling-Stanley, Chief Gold Strategist, and Diego Andrade, Senior Gold Strategist.
Tremendous effort has been put forth by global monetary and fiscal policymakers to help stabilize markets and economies during the COVID-19 crisis. The playbook for this crisis appears remarkably similar to the one that was used during the 2008 financial crisis – with staggering amounts of debt, liquidity, and deficit spending being deployed. Simultaneously, gold has experienced an impressive rise in price – and investment demand – despite its recently weaker jewelry demand.1
Making sense of the initial COVID-Related impact on gold
Gold’s price movement and the catalyst behind rising investor interest in gold was initially driven by the extreme market volatility in Q1,2 illustrating gold’s historical “flight-to-safety” advances during absolute market dislocations. Since then, investor focus has turned to the potential longer-term consequences of these monetary and fiscal decisions. At a high level, many of these actions may stand to benefit the outlook for gold. While gold has broadly tracked rising central bank balance sheet levels over the past two decades, gold investors should focus on the impact these debt levels may have alongside rising deficits and low rate policies on the US dollar (USD), and in turn the potential advantage for gold.
One of the most notable actions taken by central banks has been the significant expansion of their balance sheets through debt and other asset purchases to spur market liquidity. G4 central banks alone have seen a 31% year–to-date increase of their balance sheets to $20 trillion as of May 31, 2020.