Last week, gold futures gained 2.81 percent, posting gains for the ninth consecutive week and rising above the $2000 level for the first time, followed by Silver futures, which gained 13.73 percent.It seems that many traders are concerned about high inflation. The main reason behind this concern is the belief that the actions that the U.S. Federal Reserve is taking to counter the effects of the spread of the coronavirus in the economic performance could lead to hyperinflation. Gold is often considered a hedge against inflation so it makes sense that traders are rushing towards this as well as other precious metals.
Another factor is the fading optimism regarding the future of the US economy, which has weighed in on the dollar's performance as of lately, remaining almost steady last week gaining 0.09 percent against a bundle of its main competitors. At the moment, The United States leads in the number of coronavirus infections, with 5,149,723 confirmed cases as well as a death toll of 165,070, followed by Brazil, India, and Russia. Around the world, there are 19,806,971 confirmed Covid-19 cases, as well as a death toll of 729,595.
The discussions among US lawmakers regarding a new aid package are essentially stalled as they have not been able to reach an agreement on whether they should approve an additional $600 unemployment aid, or bring it down to $200. The recently released US economic data also has shattered any hope for a V-shaped recovery, though showing some gradual progress.
“In the absence of a timely and substantial fiscal package we should be braced for the threat of weaker employment and spending numbers, which will provide a major test for financial market optimism on the ‘V’ shaped recovery,” commented an analyst at ING.
The Federal Reserve recently decided to keep the cash rates unchanged, leaving its target in a range between 0 and 0.25 percent. The bank signaled its willingness to use its full range of tools to support the economy as to keep the cash rates low until the economy is back on the track towards full employment and the bank's inflation goals.
One of the actions that the bank has taken to support the economy is buying a huge quantity of securities, a measure that is known as "quantitative easing" and that has caused fears for hyperinflation since the Federal Reserve and other central banks from the developed world decided to implement it after the 2008 crisis.
At the beginning of the Covid-19 outbreak, the bank pledged to buy at least $500 billion in Treasury securities as well as $200 billion in mortgage-backed securities, however afterward it removed the limit on its purchases and pledged to buy as much as it's needed to aid the performance of the US economy. At the moment, the bank's balance sheet stands at $7.0 trillion, and some estimate that it would need to expand its balance sheet significantly in the upcoming years to achieve its goals.
As might be expected, not everyone is enthusiastic regarding the effectiveness of the yellow metal as a hedge against inflation. Recently the press reported the research of a Duke University finance professor, stating that similar claims and arguments regarding the relationship between Gold's fundamental value and inflation were made in 1980 and 2011, which led to its depreciation, losing its real value by 65 and 33 percent on the upcoming years respectively.
Despite fears for hyperinflation which could not materialize, the markets are now bullish on the yellow metal and it seems that as long as uncertainty concerning the future of the global economy dominates the markets traders and investors will continue rushing towards it.