Gold has reliable means of value preservation and is not subject to supranational interference. From the perspective of investors, at the moment of the outbreak of the new crown epidemic, with the decline in unemployment and consumer confidence and the downward trend of the economy, investors have chosen to avoid risks and choose gold with a value-preserving function, which has triggered investment Those who chase the wave of gold.

On the other hand, from the perspective of banks, the financial market turmoil under the new crown epidemic has led to an increase in the spread of gold futures on the futures exchange. Financial futures refer to the trading method in which traders make transactions in an open auction at a specific trading venue and promise to buy or sell a specific amount of a certain financial commodity at a predetermined price on a specific date or period in the future. Gold futures are affiliated with financial futures. The huge price difference under the new crown epidemic has caused a cowardly game in the futures market. Traders have snapped up gold contracts because they think it is difficult for banks to obtain sufficient gold to fulfill their contracts. This has greatly increased the pressure on banks’ gold demand. At the same time, banks also need to worry about short delivery problems when the original futures contract expires. All these have prompted banks to chase gold to hedge their risk exposure, which has triggered a wave of gold chasing by bankers.

It can be seen that although the original gold standard has been completely dismantled, and the relationship between the dollar and gold under the Bretton Woods monetary system has long been lifted, under special circumstances such as the new crown epidemic, people still continue to believe in the value of gold. It triggered a gold rush among investors and bankers.

2. The chaotic gold market

2.1 Gold market arbitrage mechanism

Arbitrage trading in the foreign exchange market is a behavior in which investors make use of the differences in interest rates in different regions to earn interest rate differentials. From this analogy to the gold market, we can infer the arbitrage mechanism in the gold market caused by the huge gold spread under the new crown epidemic: According to an interview with a retired senior gold trader by the Wall Street Journal, under normal circumstances, it is necessary to Arbitrage in the gold market, the transportation cost per ounce of gold is about 20 cents. The cost of melting gold bars and remanufacturing them into other countries’ delivery standards is slightly less than 20 cents, and the financing cost is about 10 cents per ounce of gold. The cost of arbitrage in the gold market is slightly less than 50 cents ($0.5). In other words, if the gold price difference between the two countries is 1 U.S. dollar, then investors can make a profit of 0.5 U.S. dollars per ounce by buying gold in low-priced countries and selling gold in high-priced countries. In other words, if you transfer 5 tons of gold (approximately 176370 ounces), you can get a spread of $88,185. This is a very substantial income for companies and investors with transportation capabilities.

2.2 “The law of one price” fails

The law of one price in an open economy means that due to the existence of arbitrage activities, under the conditions of free trade, the price of any commodity on the world market is the same no matter where it is sold. Therefore, when there was a huge difference in the price of gold across countries, cross-market traders would buy gold at low domestic prices and sell them abroad at a high price. Through this set of profit activities, the actual exchange rate was adjusted to be equal to the equilibrium exchange rate. Spreads are back on track.

However, under the general background of the new crown epidemic, the international flights that originally transported gold were basically grounded. Liquidity under an open economy could not be guaranteed, and the short-selling market in the gold market prevailed. The increase in risks and the increase in transaction costs all made the original of inter-market arbitrageurs are discouraged.

Therefore, despite the huge temptation of the gold market’s arbitrage mechanism, due to the increase in transportation and transaction costs and risks under the new crown epidemic, the overall gold price still shows an ‘N’-shaped trend, and the gold market with a hedging function is chaotic.

3. The impact of the wave of gold chasing

The inflow and outflow of gold will inevitably have an impact on a country’s balance of payments and economic conditions. When the development of the epidemic in a country gradually stabilizes, consumer confidence continues to increase, and economic conditions improve, the demand for gold with value preservation and risk aversion will be weaker than that of other countries, but the supply of gold in other countries will be closed due to the closure of gold refineries. Reasons such as work stoppages are very tight, so the country’s gold is outflow. This will reduce bank reserves and reduce currency in circulation, which will lead to a decline in country prices, enhance the competitiveness of commodities, further increase exports, reduce imports, and promote a surplus in the balance of payments.

4. The development trend of gold in the post-epidemic era

As the global epidemic continues to improve and eventually subsides, the supply and demand of gold in various countries will tend to normal levels. The “law of one price” under the open market and the original arbitrage mechanism will gradually return to normal. The price difference will also return to the normal fluctuation range, the international balance of payments affected by it will gradually return to a balanced state, and the overall gold market environment will eventually gradually return to the right track.

By Demi Zhang