Gold exchange rate grows as delta coronavirus spreads

In July, precious metal quotes increased. The main reason is a decrease in the yield of the US Treasurers amid investor concern about the pace of economic recovery and the rapid spread of a strain of coronavirus called Delta. Despite the rally, the price of yellow metal is still trampling around $1,800 per troy ounce. However, experts are confident that investors in global financial markets will continue to be nervous about the pandemic. The gold market is awaiting a tipping point after which it will become clear whether its further correction is planned or a return to historical highs will take place.

July Gold Market Brief:

• In July, precious metal prices rose 3.6% in dollar terms. At the end of the month, precious metal traded above $1820 per troy ounce.

• The price of silver fell 1.1% for the month. The increase in the gold exchange rate did not affect the fall in the price of gray metal.

• Stock markets continued to grow. In July, the S & P 500 index rose another 2.3%. At the moment, it has almost doubled from the lows of March 2020.

• The yield on 10-year US Treasury bonds fell sharply at the end of July, amounting to 1.24% (in real terms: -1.17%), which is 0.21% less compared to June, when it approached 1.45% (in real terms: -0.87%).

• Cryptocurrencies have risen in price. The price of bitcoin increased by 14% in July, exceeding the mark of 40 thousand US dollars by the end of the month.

Full report for July 2021

During July, gold quotes rose by almost 4% in dollar terms, gaining a foothold at $1,825 per troy ounce. Dragmetall was helped by a decrease in nominal and real yields of 10-year US Treasury bonds amid growing concerns about the spread of the Delta strain. However, quotes of other precious metals decreased in dollar terms: silver (- 1.1%), platinum (-1.4%) and palladium (-1.8%).

Why does gold not rise in price?

Despite the increase in prices, gold does not show a serious upward trend. On the one hand, experts expect that the growth of precious metal quotes will be affected by an increase in inflation, a decrease in bond yields, demand for precious metal from central banks, as well as the consequences of the pandemic. On the other hand, there are suggestions that inflationary pressures will be temporary, and stability in stock markets will restrain demand for protective assets. However, the fact remains. The main catalysts for the growth of the yellow metal have not yet been able to return its course to the maximum of last year. Consider in more detail the effects of these factors on gold behavior.

Real bond yields increased significantly from August last year to March 2021, which partially explains the decline in the price of gold by almost 20% over the same period. However, since the end of March, real bond yields have decreased to the level of August 2020 indicators. Despite this, the current gold price is below the August 2020 high by more than $200. It can be explained like this. Today, there is an opinion on the market that the high inflation rate of consumer prices is a temporary phenomenon. Recall that the consumer price index in the United States (hereinafter - the CPI) was + 4.2% in April, + 5.0% in May, and + 5.4% in June. Experts prove the transient nature of inflationary pressure by the fact that it is due to a temporary factor - a pandemic. For example, energy prices fell sharply in the first half of 2020, but subsequently increased by 25%. During the active phase of the pandemic, the supply chain was disrupted, leading to short-term price hikes. Currently, the supply situation is stabilizing. Experts prove that the current surge in inflation is temporary, by referring to the median CPI (leading inflation indicator), which has increased by only 2.2% over the past year. However, this means that the difference between the total CPI and the median CPI currently exceeds 3%, the largest gap in 20 years. So, investors do not see the current inflation rate as a serious threat, so the current surge in inflation is less than gold.

Another, and perhaps the most important, factor that restrains the growth of yellow metal chickens is stocks. Stock market indices are rising. The upward trend in this market is so strong that the S & P 500 index may soon reach double the March lows of last year. If the market reaches this figure by mid-August, there will be the fastest doubling of the index in the history of observations: It took longer to recover from the coronacrisis than to recover from the global financial crisis of 2008-2010. Based on the annual moving average, it can be argued that since the beginning of the year the S & P 500 index has grown by 34%, which, of course, will not compare with the dynamics of the gold exchange rate. The increase in risk asset quotes explains the fact that gold had no chance of breaking through.

However, there are analysts and investment managers who positively assess the dynamics of gold prices. Diego Parrilla, manager of the Quadriga Igneo Foundation (Spain), said that gold quotation growth factors have not disappeared, but have actually intensified. The expert is sure that in the next 3-5 years, the course of precious metal may well reach the range of 3-5 thousand US dollars.

Yellow metal demand trends

The World Gold Council published a report on trends in demand for precious metal for the second quarter.

The main findings of the report are:

• Investments in coins and bullion increased by 56% year-on-year. There is still high demand in Western countries.

• The demand for jewelry increased by 60% year-on-year, but still lags by 17% from the average for 2015-2019.

• Net purchases of gold from central banks amounted to 200 tons. The main buyers were Thailand, Hungary and Brazil. For the first six months of 2021, net purchases amounted to 333 tons. This is the third highest indicator in the last decade.

• There is a moderate influx of shares in gold exchange funds. Yellow metal reserves in these organizations increased by more than 40 tons in the second quarter. Compared to the second quarter of 2020 (400 tons), there was a decrease of 90%.

The report indicates that in the second quarter of 2021, the average price of gold in dollars was $1816.50 per ounce, which is 6% higher on an annualized basis. This statistic suggests a rosy prospect for yellow metal. Currently, interest in gold is low, and its price is almost 10% lower than the historical maximum recorded in August last year, but precious metal is still in demand on the market. Strategic gold acquisitions from investors will recoup themselves, as its quotes will rise. Here are the main reasons for its growth in the future: fears about a possible slowdown in global economic growth; inflationary pressure; low or negative yield of "treasurers"; the continuation of the trade war between the United States and China; geopolitical tensions.

Gold is a protective asset that protects capital from economic and financial crises, currency devaluation, political instability, negative interest rates, while guaranteeing decent returns in the long run.