Gold has experienced resurgence as a reserve asset – central banks have become net buyers over the past 10 years, and their holdings have reached levels not seen since the 20th century. This has several origins, among them growing geopolitical tension between regional blocs; the swelling share of negative-yielding fixed income securities; and the emergence of possible challenger currencies to ‘king dollar’, which holds a more than 60% share in global foreign exchange holdings.
Currently, all eyes are on headlines about the virus, many central banks may be dovish—which lowers other currencies, even as the U.S. seems to be the most liquid and safest for capital. All this is temporarily leaving gold buyers to seek other trading opportunities for now.
Price losses for the metal had worsened in the wake of data released Monday that U.S. manufacturers grew their businesses in January for the first time in six months. The survey by the Institute for Supply Management rose to 50.9% last month to 47.8%. The moves for bullion come after the most-active April contract saw a weekly climb of 0.6%, and a rise of about 3.8% for the month. The settlement level also marked the highest weekly price finish since March 2013.
Gold futures on Monday posted their first loss in four sessions, with haven demand for the metal taking a hit as U.S. equities partially bounced back from a corona virus-triggered selloff, and the U.S. dollar and government bond yields rose.
However, the spread of corona virus around the world continues to dominate commodity markets. The energy sector remains the focal point of the selling, with crude oil under pressure.
China’s National Health Commission on Sunday said cases of the novel corona virus reached 17,205, while the death toll was more than 360. Cases also have been reported outside the country, with the World Health Organization and Trump administration last week declaring public health emergencies.
Gold continues to shine amid the turmoil. The safe-haven asset has seen strong demand over the past week as investors rotate out of risky asset classes. This has seen the gold price push towards USD1, 600/oz. Dovishness from the US Federal Reserve has helped. Chair Powell said the central bank is carefully monitoring the epidemic and its effects on the US economy.
We expect a lower U.S. dollar over time, and this is one of the major drivers of gold and silver prices. Second, as long as the amount of negative-yielding government bonds is substantial, precious metals and commodities are attractive to invest in (not negative-yielding). Third, major central banks will likely continue to support their economies, and higher official rates are nowhere on the horizon. Fourth, we expect some pick up in jewellery demand from China.
While we expect these events will continue to play a major role in determining precious metals prices in 2020, there are, of course, other variables to consider as well, particularly the underlying fundamentals of supply and demand.
What is more, the recent increase of unrest in the Middle East is slowly building in a premium in precious metals prices, first and foremost supporting gold and silver as a hedge against increases in systemic risks. The political rhetoric is surely heating up in Iran and Iraq following the US attack on a high military Iranian official and, together with the ongoing trade deal saga, these two events could well be the main catalyst for higher precious metals prices in 2020.
Gold has been going strong. It has always been looked over as a hedge tool. Gold can provide a protection cover against systematic risks, stock market pullbacks, and recessions. It even lowers the risk in a portfolio and efficiently manages diversification. It further provides liquidity to meet liabilities during times of market stress.
Research shows, an allocation to gold in a typical stock/bond portfolio has provided better returns than those with little or no gold. It also lowers your risk.
Portfolios that include gold have fallen less in bear markets and risen more in bull markets. The long-term value of a portfolio is clearly enhanced by including gold.
And with continued escalation and unrest, demand for gold is expected to rise further as markets will rush towards this safe haven asset which is further expected to push prices high.
Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.
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