What’s the fair value of gold?

by CMEGroup.com

Many investors and traders have asked this question while reassessing their portfolios and risk exposures in light of COVID-19.

The world economy experienced an unprecedented shock in 2020, and no single asset class was immune.

Read why the global gold markets took center stage when gold climbed above $2K per troy ounce in August, and what to watch for as 2020 winds down.

Macro environment for gold

Back in March, governments and central banks across the world took quick action when the global economy went into lockdown mode. The support they gave to protect citizens and businesses also fed through to financial markets. The Federal Reserve and other central banks have promised to keep interest rates at record-low levels until further notice. Low interest rates make gold more attractive, since low financing costs reduce the opportunity costs of holding gold in a portfolio. Another factor has helped push gold higher: since it is priced in U.S. dollars, a decrease in the value of the dollar naturally increases the price of gold. The U.S. dollar has been weakening against many of its global competitors this year: it lost strength versus the Euro, the Yen, the Swiss Franc and the Chinese Renminbi. Finally, the uncertain economic outlook may have led many investors to increase their exposure to the yellow metal as a safe haven asset.

All in, this created something like a perfect environment for gold to reach a $2,000 price level. Since then, the metal has fallen back slightly, just as the U.S. dollar and interest rates have shown tentative signs of strengthening. For the remainder of the year, the upcoming U.S. elections will be one of the key events to watch. Of course, the Covid-19 pandemic is not under control yet, and so it should also continue to have a significant impact on financial markets and on the price of gold.