These are strange times on Wall Street. Stocks are surging on optimism about a potential economic rebound. Yet investors are still very nervous about the growing threat of a second wave of Covid-19 cases in the United States.
Just look at the rally in gold.
The price of the metal is now above $1,800 an ounce — its highest level since September 2011 — and it is creeping toward that record high of more than $1,900. Gold has soared nearly 19% so far in 2020.
Gold’s continued surge is a bit curious given the comeback in the broader market. The pop in gold prices earlier this year made more sense since gold often tends to do well in times of financial stress, when fear is prevalent.
After an initial dip following the 2008 Lehman Brothers bankruptcy, gold rallied as the market melted down later that year and into early 2009, for example.
And gold prices hit their all-time high in 2011 after Standard & Poor’s downgraded the United States’ credit rating, amid market jitters about Europe’s sovereign debt crisis.
Gold as a hedge
Mounting anxiety on Wall Street over coronavirus helps explain the surge in gold prices.
The CNN Business Fear & Greed Index, which measures seven indicators of investor sentiment, is edging back toward “fear” territory after hitting “greed” levels just a month ago.
Yet investors have continued to flock to gold — a sign of stress — despite a huge rally in big tech stocks and the broader market — a sign of confidence.
What’s going on? Some investors may be hedging their bets. There’s still a lot of skepticism that belies the fragile recovery.
Buying gold could be a good hedge against a potential stock market pullback if the rebound in earnings and the economy doesn’t materialize in 2021 as expected.
Investors also might be betting on an eventual surge in inflation, said Gerald Sparrow, chief investment officer for Sparrow Capital Management, in an interview with CNN Business.
Sparrow pointed out that gold prices tend to soar when the Federal Reserve is keeping interest rates extremely low, as it is doing now. The Fed is also trying to boost the economy by getting more money into the system with a variety of loan programs.
All of this stimulus could eventually weaken the value of the dollar and create higher inflation pressures. And that would be very good for gold.