The United States and China, the two most powerful economies in the world, had nearly ended their 22-month long trade war in January until the US President Donald Trump once again accused China of spreading the deadly COVID-19 virus that has infected millions of lives worldwide. President Trump had long accused China of unfair trade practices and intellectual property theft but the recent remarks went like a twisted knife in the wound. Senator Martha Mc Sally during a recent congressional hearing held China responsible for unleashing this virus on America and eventually the world. Adding to the history of trade battles between the two countries, President Trump later expressed discontent over reopening negotiations on the trade deal with China, days after the US warned Beijing of very serious consequences for faltering the bilateral agreement while also highlighting its impact on the global economy.
While America wanted a more balanced approach to trading practices with China, the latter firmly believed that America had time and again hindered its economic progress, coming in its way of becoming a global economic superpower. This fuelled a bitter trade battle between the world’s two largest economies. The tit-for-tat tariff war since 2018 led to import taxes being levied on more than $450bn worth of trade goods which disrupted trade flows worldwide and dampened the global economic growth. This war weighed massively on the global economy, hurting businesses worldwide with shrinking purchasing power each day.
In the last two years, many economists also said that the dispute was well beyond trade as it represented a power struggle between two varying world-views. After imposing tariffs on hundreds of billions of dollars worth of one another’s goods, the two countries finally decided to put their conflicts aside and signed a preliminary deal in mid-January this year. The centerpiece of the deal was China’s agreement on purchasing at least an additional $200 billion worth of US goods and services above a baseline of $186 billion in 2017. The US, on the other hand, dropped plans to impose tariffs on an additional $160 billion worth of Chinese exports and halved existing tariffs on $110 billion of Chinese goods to 7.5%. The countries also came to a mutual ground on intellectual property rules, counterfeiting, etc, and decided to resolve more issues in the near future. But who knew the second largest economy in the world would soon become the origin of a disease that consumed the whole world in a matter of weeks? That’s exactly when things started going south for both the countries, with the US soon becoming the epicenter of COVID-19.
Investors are searching for Safe Havens in turbulent times
The impact of the trade tensions was far beyond the borders of the two countries, putting global investors in a major dilemma. With the governments running into huge fiscal deficits and businesses shutting down like never before, investors worldwide started to look for safe havens such as gold.
Gold prices have rallied 45% in the past one year and are expected to soar amidst the escalated tensions between the two countries over the COVID-19 outbreak. The Trump administration even threatened to punish Beijing with new tariffs for the way it handled the pandemic, which in turn kindled fears of a new trade war between the US and China, something far more impactful than all the previous trade battles. As investors started looking for safe investment options, we witnessed gold surging to an all-time high of more than $1700 per ounce last month. Some experts have also anticipated that the brewing trade conflicts will further its impact and the prices may touch $1900-$2000 soon.
The below table represents how this precious metal has performed when the markets were struggling. We have seen gold perform extremely well in 2000 during the dotcom bubble, and also during the global financial crisis. While the current situation is much bleaker, the recent soaring prices again instilled confidence.
Gold has also emerged as one of the best performing asset classes in 2020 with prices hitting an all-time high.
Gold continues to gain momentum while the world fights Covid-19
A sad state of global recession due to the pandemic, a resurfacing trade uncertainty, lower long-term rates, central bank net buying of gold, and riskier markets have proven to be an upside for Gold. Undoubtedly, given the worst state of affairs of the world, gold is a good asset class and is expected to do really well in the near future. The markets are going to be risky and a pre-determined set asset allocation will only help investors battle global events and market volatility. Advising not to go overboard, experts suggest that exposure to gold in the current times will help sail through the difficult times. A prudent investor should allocate a portion of his assets to gold.
Takeaway
Gold gave a 25% return on investments last year when there was no threat of a pandemic and has already given a return of 16% amidst an ongoing pandemic, insinuating that it will shine even more in the coming months.
The negative correlation between gold and equities is yet another factor that should encourage investors to shift their investments from equities to gold. The pandemic and the continued trade tensions have negated the value of equities, nudging investors towards gold.
The research of Oxford Economics also indicates that gold performs well in periods of deflation where interest rates are low, consumption is going down and there is a looming financial stress. Long term investors who wish to protect their wealth against unprecedented circumstances should not be concerned over a small price movement and their complete focus should be on its benefits in the long run. Gold, of all investments, will be a wise pick in the challenging times of COVID-19.
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