When monitoring the price movements of a stock, commodity, or currency; what are investors really on the lookout for? In my mind, they are after two things. The first is understanding its propensity to fluctuate; in other words, can the asset hold its value or is it subject to sudden price swings that could incur sudden returns/losses? Once established, the second objective is determining under what market conditions it is most appropriate to buy and sell the asset. 

As one would expect, applying such abstract theories of observation to real world situations is not always neat or easy. Let’s take gold as an example. (GLD)

We know that gold is a safe haven asset. As a commodity in constant demand, it is able to hold its value well in times of market volatility. Investors generally buy gold to hedge against uncertain trading conditions, which is why we see the price of gold rise when the major stock market indices are in the red.  

Knowing when to buy gold is difficult. One handy tool I recommend is the volatility index, or VIX. This is a real-time market index that presents a 30-day forward looking volatility forecast, measuring market risk and potential investor sentiment. When the VIX rises, we generally see a drop in the gold price. Conversely, if the VIX drops in price, we should see the price of gold rise. (VIX)

Why is buyer demand for gold rising 

Gold has so far proven to be one of 2020’s standout assets in terms of price growth. Its market price has increased by around 19% since the beginning of the year. This growth is a result of the uncertain and volatile trading conditions brought on by COVID-19. For the first six months of the year, investors and traders rallied to the precious metal as part of a hedging strategy. 

As countries around the world slowly wind down their social distancing measures and introduce fiscal policies to stimulate a post-pandemic economic recovery, one would expect the price of gold to stabilise. Interestingly, this has not proven to be the case. Instead, there is a general expectation that gold will surpass it’s all time high of $1920 per ounce and even reach $2,000 per ounce by the end of the year.

This is a remarkable projection, and seems to suggest that companies, wealth funds and investors are not confident the COVID-19 pandemic has been effectively contained just yet. 

One key lesson of 2020 is that the future will always remain unknown and that all options will always be on the table. We could be on the brink of a post-pandemic market recovery or be about to witness a second outbreak of cases and a reintroduction of lockdown measures. At the moment it looks as though investors are being cautious, rallying towards safe haven assets like gold and awaiting greater certainty. If this trend continues, there is a good chance 2020 will prove to a be record-setting year for gold. For now, I recommend monitoring the VIX closely.