The novel coronavirus pandemic has claimed lives of over 70,000 people globally and paralysed large parts of the economy.
After rising on safe haven demand, gold prices saw a minor correction in March, mainly for these reasons:
- Investors sold everything including equities, bonds and precious metals amid the panic caused by an unprecedented non-financial hazard to financial stability.
- Lockdowns across the world and social distancing norms raised concerns about mining of the precious metal.
But gold continues to receive support as central banks across the world infuse more liquidity into the banking and corporate systems
The U.S. Federal Reserve has cut the benchmark policy interest rate to zero and the U.S. federal government has announced $2.3 trillion economic relief package and promised more if needed.
The ECB and the Bank of Japan have held interest rates in negative and Japanese Prime Minister Shinzo Abe is set to declare a state of emergency as the virus cases in Tokyo jump. In the United Kingdom, the death toll nears 5,000 even as Prime Minister Boris Johnson is hospitalized due to the virus. Lower interest rates reduce the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies.
However, after the dip in March, bullion prices were on an uptrend after President Donald Trump told U.S. citizens to prepare for “very, very painful two weeks” on Mar 31. Also, weak economic data hurt confidence.
Gold prices gained, erasing three-quarters of this week’s drop, gaining to $1612 per ounce as U.S. indices rallied despite weekly jobless benefit claims rising to record high. The initial jobless claims by the Americans jumped to nearly 10 million for two consecutive weeks ended Mar 21 and Mar 28.
The U.S. has never lost more than 1.4 million jobs in any two successive weeks in its history. Moreover, auto sales declined to 11.4 million in March from 16.7 million in February. After rising steadily for 113 months, job creation in the U.S. is witnessing a contraction and the economy losing 701,000 jobs as workplaces and factories shut down across the country.
According to experts at RiddhiSiddhi Bullions Limited, this has boosted safe-haven appeal of gold as investors are concerned over the economic fallout from the pandemic and the rising risks of a global recession.
However, the rise in gold remains capped as the US dollar continues to rise as a preferred safe haven currency despite the weak economic data from the US, claimed one of the top gold dealer in India. The dollar and gold prices are negatively correlated as pricier dollar makes gold more expensive for holders of non-dollar currencies.
In the long run, gold remains a preferred asset in a low interest rate environment as the virus-induced slowdown will support a prolonged rally in the commodity, said one of the bullion dealers in India.
While equities tend to dominate the headlines, gold has been the star performer of the past two decades. Gold has outperformed both the Down Jones index and the US Dollar since 2001, up 498% compared to the 98% gain on the Dow Jones, while the greenback fell 81%. Gold remains a favourite.
Investors continue to be in a wait-and-watch mode to check how bad the global economy will do and how long the depression-like conditions would last.
Traders expect gold prices to edge higher, after the payrolls data but gold’s problem is that supply tightness is easing while the dollar continues to gain. Ultimately, the bullion will benefit from the fiscal and monetary stimulus.
As investors search for safe haven in an uncertain world, triggering demand for gold, which is considered as a key investment option during times of financial turbulence.