Gold has been on a tear with its price jumping over 50% in the last one year. In international markets, gold crossed $3,000 an ounce on March 14, while in India, gold rate today is Rs 87,970 per ten grams.
The recent surge in gold prices is due to the R-word – recession, which now seems to have taken centerstage.
We will come back to this later, but first, what else is driving gold.
Historically, gold has always been the investor’s go-to asset class when there is uncertainty. Now, there is a greater sense of uncertainty in world affairs following President Trump’s return to office.
Trump’s tariff policies, in particular, are looking ominous to global trade. The dollar and gold are at the heart of a currency and trade war that is simmering beneath the surface.
In fact, it would be fair to say that a global trade war has begun.
Trump fired the first salvo by imposing tariffs on imports from Canada, Mexico and China. Acting swiftly, these three nations and now even the European Union announced counter tariffs on US imports. This all-out conflict will take center-stage after April 2, when Trump’s “reciprocal tariffs” go into action.
The big shake-up in the financial markets was waiting to happen. Trump, being as vocal as perhaps anyone in his position can be, said he is not ruling out a recession as a result of his administration’s tariff policy changes.
Trump called the present economic phase a ‘period of transition’. As a direct result of that statement, $4 trillion was wiped out off in the stock markets. Trump retracted on his views later but the damage was already done.
But what has recession got to do with gold price? Let’s see.
Gold’s out-performance during recession is logical as investors seek safe havens during crisis. Also, during a recession as governments print money to jump start the economy, expected inflation increases leaving gold as the only asset that acts as a solid store of value.
A recession results in a significant decline in value across various sectors, including currencies, stock markets, real estate, and property. This decline in values often leads to further money withdrawals, thus potentially triggering a downward spiral.
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