LETTERS: Gold is a precious metal and a commodity that investors can use as a safer investment during economic uncertainty.
Economic disruption due to the Movement Control Order following the outbreak of Covid-19 has resulted in lower production due to lower demand for goods and services.
Business performance has been negatively affected and investors are experiencing negative investment returns.
Some investors have transferred their funds from equity and other investments to the gold market, which is considered a safer haven to protect their investments.
Investors use gold as an asset to hedge their exposure during economic uncertainty as gold has been found to retain its value during turbulent market environments.
Gold prices remained below US$1600 per ounce prior to the announcement of the Covid-19 pandemic by the World Health Organisation.
Gold prices started to show an uptrend after the pandemic was announced last year and reached US$1,951 per ounce on Jan 5 this year.
In the post-pandemic period as many countries start to vaccinate their citizens, the economy is expected to show recovery. The International Monetary Fund has projected gross domestic product growth of 5.5 per cent this year and 4.2 per cent next year following the economic recovery.
What will be the outlook for gold in the post-pandemic period? With economic recovery en route, will funds be transferred out for equity and other investments?
The Covid-19 pandemic and its economic consequences that heightened investors' risk aversion have spurred demand for gold as a safe haven.
Even if we don't consider the pandemic factor, the change in gold prices can be attributed to events such as quantitative easing by some advanced economies to combat the pandemic and to support economic recovery, as well as the subsequent depreciation of the US dollar.
Quantitative easing that increases the supply of money has implications for investment. Quantitative easing can also have the effect of reducing the value of money and causing higher inflation.
Higher inflation affects the cost of living and results in lower purchasing power. Investors will naturally be worried about the impact of inflation and low interest rate on their investment values in the long run.
In addition, as the benchmark pricing mechanism for gold price, changes in the US dollar affect the prices of gold globally.
Therefore, a weaker US dollar is likely to encourage investors to divert their investment to gold. Recently, there were calls for gold to be a safe haven asset against the volatility of cryptocurrencies.
History suggests that there are many volatilities and uncertainties in post-crisis periods that may have spillover effects on other sectors of the economy. Even though Covid-19 vaccines have become available, the new waves and new Covid-19 variants remain a main concern for investors.
Therefore, to protect investments, investors can reallocate their portfolios in favour of commodities such as gold that are considered to be safe havens.
Analysts believe that there will be a correction in gold prices when Covid-19 vaccines prove to be able to protect people against the virus.
Subsequently, investors may need to reallocate their investment portfolio, including gold, when the economy is recovering from the pandemic.
Tay Bee Hoong
Senior Lecturer, Faculty of Business and Management, Universiti Teknologi Mara, Segamat, Johor
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times