COVID-19 and gold price jump: FAQ on investments and economic impact

COVID-19 and gold price jump: FAQ on investments and economic impact

While gold has long been considered a safe-haven investment in uncertain and highly volatile markets, two RMIT University finance specialists say it’s important for investors to think cautiously, understand their goals, and increase their knowledge about how gold investments work to make sure it matches their tolerance for risk.

With the recent rise in gold prices, Dr Pham Nguyen Anh Huy and Dr Nguyen Thi My Linh from RMIT University’s School of Business & Management, explored common questions about the impact of gold prices on the economy especially for private investors, who are looking to invest in this currency.

news-2-covid-19-and-gold-price-jump-faq-on-investments-and-economic-impact RMIT Finance lecturers Dr Pham Nguyen Anh Huy (pictured left) and Dr Nguyen Thi My Linh (pictured right) discussed the impact of gold prices on the economy from private investors, who are looking to invest in this currency.

What’s your view of the gold market and the factors affecting the jump in prices?

Dr Pham: The gold market experienced unprecedented growth then went down gradually over the past 30 days because of uncertainties brought by COVID-19.

COVID-19 has paralysed economies, lowered oil prices and weakened the US dollar. At the same time, governments have been offering huge economic bailouts and that has led to a reduction in the yield of government bonds. All of these factors pushed the global gold price to an all-time high before it went down. Of course, the Vietnamese gold market is not excluded from this bullish run. During the recent price increase, the domestic gold market fluctuated quite closely with the world market. This is quite reasonable as our economy is integrating into the world more than ever.

Some investors have rushed to buy gold with the hope of making a profit but also prepared to suffer a loss. From an economist’s perspective, should investors try to increase their assets this way?

Dr Pham: Herd mentality has always been a serious problem across economies, especially in emerging economies like Vietnam. When investors (especially small investors) see a volatile market, they tend to follow the actions of the crowd. This is extremely risky as they only invest out of fear of missing out, while not having a good understanding of the market. Gold is a relatively safe, low-risk asset and is used to hedge (or protect) against changes in the economy. Normally, investors will convert some of their assets into gold to minimise risks to their portfolios and preserve their assets from a volatile stock market or unpredictable changes in the economy. Therefore, smart investors do not usually invest in gold as a means to increase the value of their assets in the long run.

Many Vietnamese investors are riding the wave of the gold price hike with the desire to get rich quickly, and this is an extremely risky behaviour in any market. This is because there is always a huge gap between the buying and selling prices of gold when the market is volatile, and investors could suffer a huge loss as soon as an investment decision is made. It is important for investors to note that gold is seen as an unproductive asset. That means that the money invested in gold gives very little earning compared to investing in other assets. 

news-3-covid-19-and-gold-price-jump-faq-on-investments-and-economic-impact World gold prices was going up and down from 8 June to 7 September (Source: Thomson Reuters Eikon, accessed on 7 September 2020)

What is the best thing for private investors to invest in right now?

Dr Nguyen: Investors should consider carefully before investing too much money into gold and should diversify their portfolios or use leverage (to buy gold). Otherwise, it might be quite a risky investment.

The best thing for individual investors to invest in right now is the one that matches with their risk tolerance/risk profile and financial circumstance. Investors need to assess how much risk they are willing and able to take. With high price volatility and uncertainty at the moment, gold can be considered quite risky so may not be suitable for investors who are risk avoiders.

Instead, these investors should diversify their investments and allocate a sufficient amount to other safer investments (eg. term deposits, bonds). The financial circumstance is important too given the current, and perhaps near future, economic slowdown. Consequently, investors should ensure regular income and liquidity from their investments to fulfil their (and their family’s) needs.

What is the impact of the gold price on the economy?

Dr Nguyen: In Vietnam, gold is a traditional investment channel of domestic investors. However, gold price increases which may lead to large capital flows into gold can have several impacts on the current economy.

It can reduce the liquidity (free-flow) of the stock market as investors shift their capital to gold. Other investment channels such as government bonds and corporate bonds can be negatively affected too. Large funds flowing into gold can especially hurt the bank loan market which is the main fundraising channel for local firms (i.e., less bank deposits, less loans available for firms). However, this may not be a big problem given the current situation. Due to the COVID-19 pandemic and economic slow-down, the demand for bank loans is believed to remain at a low level.

According to the State Bank of Vietnam, the credit growth rate for the first six months of 2020 (as of 16 June) was only 2.13%.

About the experts

Dr Pham Nguyen Anh Huy is Lecturer, Finance from RMIT University’s School of Business & Management. His research interests are in the fields of FinTech, cryptocurrencies, environmental finance, asset pricing and empirical finance. He has published his work in a wide range of academic journals such as Accounting and Finance and Economic Modelling among many others.

Dr Nguyen Thi My Linh is Lecturer, Finance from RMIT University’s School of Business & Management. She is a regular member of the CFA institute and the CFA Society Singapore. Her research interests are empirical finance, financial services, and behavioural finance.

Story: Thuy Le

11 September 2020


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