The prices of gold went up by more than 1% on Monday to reach its highest level since October 2012. The yellow metal was supported by the damage caused by the COVID-19 pandemic which pushed down U.S. retail sales and industrial production in April to their deepest contraction since the Great Depression.
Spot gold was trading at $1,762.14 as of 0845 GMT.
Last Friday, the Department of Commerce reported that retail sales plunged by 16.4% in April. This follows an 8.3% drop in March and beats economists’ forecast of only a 12% decline. It is also the largest drop since 1992. On a year-on-year basis, April retail sales went down by 21.6%.
On the same day, the Federal Reserve reported that industrial production plummeted by a record 11.2% in April which pushed down capacity utilization to an all-time low of 64.9%. The production was pulled down by a record 13.7% decline in factory output.
A third report released last Friday by the University of Michigan showed that the consumer sentiment index improved in early May after some households received the government’s relief package. But consumers’ perception of their financial prospects for the rest of 2020 has fallen close to a six-year low.
According to Kyle Rodda, an analyst with IG Markets, the markets are expecting a slow economic recovery from the COVID-19 crisis and they are formulating their pricing based on that expectation. He also suggested that the recovery may need a low-interest environment.
Meanwhile, Federal Reserve Chairman Jerome Powell stated that the economic recovery may extend into 2021 and will depend on the development of a COVID-19 vaccine. In the UK, Bank of England’s chief economist Andrew Haldane said they are looking more urgently at taking interest rates to below zero to boost economic recovery. The central bank’s governor Andrew Bailey also affirmed that they are not ruling out negative rates as an option for dealing with the sharpest decline in Britain’s economy in 300 years.
Adding to the bleak outlook of global economic recovery is the possible renewal of the U.S.-China trade war. The U.S government has implemented rules to block the global supplies of chips to Chinese telecoms company Huawei Technologies. China’s Ministry of Commerce has expressed its opposition to the rules and vowed to take all measures necessary to protect the rights and interests of Chinese firms. As part of possible countermeasures, it was reported in a state-run Chinese newspaper that Beijing is ready to place American companies on an “unreliable entity list. This could significantly affect American manufacturers of chipmaking equipment.
In a related development, the holdings of the largest gold-backed exchange-traded fund in the world SPDR Gold Trust grew by 0.8% last Friday to 1,113.78 tons. This reflects investors’ sentiment and their continued interest in the yellow metal.