Gold has evolved dramatically in the last year and a half, its price rising by more than 45% compared to the low of August 2018. Political and economic uncertainties in recent times, as well as negative real interest rates on government securities, have created a perfect framework to raise the price of the precious metal, Tradeville analysts explain. On the other hand, the impressive advance of gold was not evenly reflected in the price of mining companies, which reached, less than a month ago, the minimum of the last four years and soon recorded a return of about 100%.
“In a context where financial markets are currently marked by uncertainty and investors consider conventional instruments risky, gold remains an attractive investment. It is sufficiently available for trade, but at the same time, rare enough to be considered valuable and, unlike other metals, it is not corrosive, which makes it durable,” explains Tradeville.
The main factors influencing the price of gold are: the real interest rate, the money supply as well as political and economic uncertainties and risks. Thus, the current situation generated by the coronavirus crisis creates the perfect setting for the impressive return of gold. However, the current rally started in August-September 2018, when a top of the yields of government securities in real terms was obtained.
At the same time, the increase in money supply has the effect of reducing the value of banknotes in circulation, producing inflation and/ or reducing nominal interest rates, thus positively influencing the price of gold. In fact, central banks around the world have resorted, among other things, to quantitative easing programs to combat the effects of the Covid-19 pandemic crisis. Tradeville analysts also point to a factor that investors should consider when investing in gold – the speculative net positions of futures traders, which reflect the market sentiment regarding the price of this precious metal.
However, the advance in the price of gold did not raise the price of mining companies uniformly and proportionately, which reached less than a month ago, the lowest in the last four years, and will then return to around 100%. The gold mining sector, as represented in the Tradeville report, had a P/E (price/ earnings ratio) of approximately 15 on May 4, compared to a P/E of 20.3 for the S&P 500 index, which indicates a possible undervaluation of companies in this sector.