Stay With Gold

Since 20th March gold prices have rallied in a spectacular manner. They have not only made up for the price weakness earlier in March, but even set a new high on 14 April (still far below the all-time of USD 1,921 on 6 September 2011). Spot gold has surged more than 10% this year, reaching an around 7-1/2 year high of $1,746.50 on April 14, as the coronavirus pandemic roiled global markets and central banks unleashed a wave of monetary stimulus’s.

In the wake of the rapid spread of the new coronavirus throughout the world, gold gained significant ground due to panic. Bullion dealers in India and around the global markets believed that gold might cross $2000 per ounce given that the situation is getting worse worldwide. 

However, on the other hand, we see economies pumping in stimulus and planning to reopen soon after the lockdown. This is boosting confidence in investors of a faster economic recovery world over, commented a top gold dealer in India on the condition of anonymity.

There were constant warnings regarding potential for a major hit to the U.S. and global economies since February 1st when U.S. virus cases were in single figures and President Trump pontificated that it would rapidly fade away completely in America.  However, by the start of this weekend, the U.S. has recorded over 700,000 virus cases, rising at around 30,000 daily and more than 37,000 deaths.  This works out at 3.7 times the number of cases which have occurred in Spain, the second most affected country according to official statistics (although true Chinese figures remain suspect) and nearly twice the number of deaths. 

However the U.S. population is far higher than that of any European nation and in terms of cases and deaths per million people, the U.S. is still well below similar figures for the most affected European countries, but the overall figure is still rising rapidly, while those in most of Europe appear to be diminishing.   At the current rate of infections and deaths, the U.S. could reach 1 million known virus cases and 50,000 deaths by the end of the current month.

Despite the alarming figures, Friday saw a big uptick in global equities and the gold price dropped back below $1,700 for the first time in the week.  Global equities picked up quite strongly on Friday and, as they did so, safe-haven assets like gold and silver fell back – equally sharply.  This was prompted, no doubt, by President Trump’s statement on getting America back to work in some less-affected states and reports that the drug, Remdesivir, was showing good results in controlling the virus in already-affected patients. 

However, it is up to the state governors to order reductions of the lockdown restrictions and relaxations. Some less affected states, however, with mostly agricultural communities, may see some return to work fairly quickly, but overall the economy will remain in the grip of the virus for some months to come. Recovery will definitely be gradual and slow.

Currently, Gold has been moving to and fro, following a series of events that have been constantly influencing its prices. 

Supply constraints- when gold prices were close to the previous low around USD 1,450 per ounce, there were signs of a shortage in the physical gold market. The temporary closing of three gold refineries in Switzerland was a major reason for these constraints. As a result, it was more difficult for investors to get their hand on physical gold.

Support level- the level of USD 1,450 per ounce has been an important support in the past. As gold prices failed to move below this level after several attempts, investors became convinced that this was a good buying opportunity.

Monetary Policy- the Fed used its full array to fight the shortage in the dollar market and to support the economy. The Fed announced unlimited asset purchases to replace the previous $700bn commitment. This has driven the balance sheet much higher. Other central banks have also eased monetary policy substantially. Aggressive monetary policy easing sounds like music to the ears of gold investors, especially as official rates and government bond yields are unlikely to rise substantially in the coming years and real yields to stay low or move even lower.

Financial stimulus- Investors have become optimistic regarding the current pandemic. There is optimism amongst investors that the world has already seen the worst scenarios in the COVID 19 crisis and that the current recession will be short-lived. Many banks announced monetary and fiscal stimulus across the globe, combined with some improvement in the number of Covid-19 casualties in countries that have been in lockdown have resulted in some optimism among investors. Gold prices have weathered well in a risk-on environment, so they have rallied in tandem with US stocks (see graph on the left below). As risk-off sentiment eased, the dollar has declined, and this has also been a support to gold prices.

Overall, therefore, the near term outlook for general economic growth looks to be dreadful, but (for gold) the outlook for more debt, more liquidity, and potentially an increase in the likelihood of inflationary pressures growing, looks positive for the price – at least in dollar terms.  We also see the longer-term negative economic outlook as keeping the equities extremely vulnerable for the foreseeable future.  

We at RiddhiSiddhi Bullions Limited also think that a lot of investors will re-evaluate the gold positions they have or the positions they would like to have. One of the subject experts at RSBL recommends staying with gold as a primary wealth protection investment.  Improvement in investor sentiment, aggressive monetary policy easing, ultra-low interest rates and fiscal stimulus has all supported gold prices. 

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