'Gold + Stocks' Trend... Investment Common Sense Broken by COVID-19 Liquidity Overload

Gold Prices Soar to Record Highs
August Deliveries Up 31.1% from March
Stock Markets Recover After Global Economic Reopenings
Speculative-Grade Corporate Junk Bonds
Traded in Largest Volume Last Month in the US
Investors Seek High-Yield Stocks
Amid COVID-19 Resurgence Uncertainty, Interest in Safe-Haven Gold Grows
Ultra-Low Interest Rates Encourage Dual Investments

[Asia Economy reporters Naju-seok and Jeong Hyunjin] The global asset market has been undergoing drastic changes over the eight months of the COVID-19 pandemic. Contrary to the conventional wisdom that "risky assets like stocks and safe assets like gold move in opposite directions," both have been rising simultaneously, while the value of the US dollar, traditionally considered a global safe-haven asset, has been declining. Even in this crisis phase, the junk bond market, consisting of speculative-grade corporate bonds, has shown growth. The massive liquidity supply by governments and central banks worldwide, combined with economic sluggishness, has created a new form of COVID-19 tailored "portfolio combination."

The new combination is gold and stocks. On the 28th (local time), the price of gold for August delivery in India rose 31.1% from the March low this year, continuously hitting new highs. Some experts predict that the price could surpass $2,000 per troy ounce and even exceed $3,000. The stock market is also maintaining an upward trend. Although the S&P 500 index fell 0.65% to 3,218.44 on that day, it has risen 43.8% since March 23 this year. Considering that gold, regarded as a safe asset, generally moves inversely to the stock market, this is an unusual situation.

Experts explain this unprecedented phenomenon in the asset market by the massive liquidity supplied to the market after COVID-19. The US investment bank JP Morgan Chase forecasted that "an additional $15 trillion (about 18,000 trillion KRW) of liquidity will be supplied globally by mid-next year." According to data from the US Federal Reserve (Fed) compiled by Bloomberg, the US money supply (M2) has increased by $3 trillion so far, and this trend is expected to continue. JP Morgan predicted, "Considering the current low interest rates, the increased liquidity will eventually flow into the stock market and other areas."

The liquidity expansion also revived the bond market, which had sharply tightened in March. As major central banks such as the Fed and the European Central Bank (ECB) purchased not only investment-grade but also speculative-grade corporate bonds, investor anxiety was alleviated. Companies reduced their financing costs due to low interest rates. According to credit rating agency S&P, the volume of corporate bonds issued in the first half of this year reached a record $2 trillion, a 49% increase compared to the same period last year. The junk bond market, consisting of speculative-grade corporate bonds, was regarded as an investment tool capable of generating high returns, supported by the Fed's unprecedented interest rate cuts. Consequently, last month in the US, the market saw record-high monthly trading volumes.

This has resulted in an abnormal phenomenon where safe assets like gold and risky assets such as stocks and junk bonds rise together. Additionally, ongoing market uncertainty, including a resurgence of COVID-19 cases mainly in the US and Europe, is encouraging investments combining gold and stocks. Some evaluations suggest that investors are choosing gold as a hedge against stock investment risks while still seeking some returns.

Ultra-low interest rates are also encouraging investments in gold and stocks. Mark Chandler, Chief Market Strategist at US investment firm Benockburn Global Forex, explained, "Considering inflation and other factors, the yield on the US 10-year Treasury bond has effectively entered negative territory." The yield on the US 10-year Treasury bond is only 0.57%.

On the other hand, the value of the US dollar, which was also perceived as a safe asset along with gold, is wavering. Initially, in March this year, the dollar was regarded as the unrivaled safe asset, surpassing gold. However, after the lifting of lockdown policies, the continued spread of COVID-19 in the US raised doubts about the US economy. Expectations that the "twin deficits" of US fiscal and trade deficits will further widen are also dragging down the dollar's value. Above all, considering the possibility of future inflation due to large-scale economic stimulus measures, there is a perception that gold is safer than the dollar. In particular, the Fed's announcement to extend bond purchases until the end of this year suggests a continued dollar weakness.

However, concerns are emerging that the gold price rally may be reaching its peak. Kali Garner, co-founder of Decali Trading, pointed out in technical analysis that "the recent rise in gold prices is an uncertain situation." He noted, "If the dollar continues to decline, gold prices may continue to rise, but this involves a very significant assumption."

This content was produced with the assistance of AI translation services.