Gold continues to remain stronger

2020 has been an exceptional year. From uncertainties to travel restrictions to local lockdown and closure of sectors, we have seen it all. Markets have fell significantly, precious metals have rallied meaningfully. Till date the financial crisis which began in 2007-08 was considered as once in a life time event. But Covid-19 has made all these events look small. 

In the past, central banks have turned to gold – universally known as the safe-haven asset. The precious metal has helped central banks tame the impact of negative sovereign bond yields and has acted as a source of value against deflation. It has also helped central banks reduce currency concentration within their portfolios. During the Covid 19 pandemic, central banks have aggressively cut interest rates and dramatically expanded their asset purchase programmes. This has supported expansionary fiscal policies and pushed precious metals higher.

We all have seen that; gold has outperformed other assets in all macroeconomic regimes. Investors have shifted to gold amidst this turmoil. The safe haven asset has been every man’s favourite in this crisis.

In spite of these uncertain times, gold has been one of the few asset classes that has generated positive returns. And we expect this to continue further said the spokesperson from RiddiSiddhi Bullions Limited. Central banks have been consciously purchasing gold and increasing their reserves. They are using it as a hedge tool against inflation. Central banks have long been purchasing gold to reduce their dependency on other currencies within their portfolios, precisely the US dollar.

Allocation of funds in their portfolios grew larger which in turn declined US dollar foreign reserve currency allocations. The sharp fall in dollar liquidity at the height of the pandemic in March and April saw investors and official institutions focus their efforts on securing access to the world’s reserve currency. 

For countries facing US financial sanctions, gold remains an attractive alternative. Hence major countries like China, Russia, Turkey etc were all focussed to increase their gold reserve and reduce their dependency on the US dollar. 

Moreover, the extraordinary economic shock created by Covid 19 creates an indeterminate stance that also affects gold. Midway through the year, there were signs normality was returning: travel restrictions were eased at home and abroad, people were encouraged to return to work, and positive case numbers across Asia and Europe fell. But this led to a second wave of infections which is expected to be even more harmful. 

Nonetheless, the sustainability of recent price increases remains uncertain. But one thing is certain- the bright future for gold. Factors responsible for this bullish trend-

• The Fed’s  policy framework
• New domestic lockdown measures are being imposed across Europe
• The US is unlikely to reopen its borders this year
• Continued market instability
• Growing uncertainty about the future shape of the global economy
• Sharp GDP falls,
• Negative bond yields
• Growing tensions between the US and China
• A protracted global health crisis

One of the top gold dealers in India, RSBL confirmed that amidst all this uncertainty, only one thing seems certain: gold will continue to be an investor’s umbrella.

Gold manages to regain strength

Just when the markets were about to enter some stability mode, post U.S elections, breaking news swept the market with immense volatility. Gold prices gained significantly before U.S Elections and dropped also at the same speed after the results were out. But surprisingly it wasn’t Biden’s victory that led to this downfall. 

Gold prices dropped nearly $100 on Monday morning after Pfizer and BioNTech announced a potential vaccine for the COVID-19 virus.

The price of gold came tumbling down after an optimistic report filed Pfizer and BioNTech with respect to the efficiency of the COVID-19 vaccines mounting to 90%. The positive news of a possible vaccine that could contain the virus and combat the global pandemic raised hopes which resulted in gold seeing a sharp decline in its price.

Gold prices tumbled over 5 % on Monday, as a corona virus vaccine developed by Pfizer and BioNTech showed a 90% success rate in an interim analysis of its phase 3 clinical trials. Optimism faded quickly however, as traders reassessed the near-term implications, with the global economy facing an imminent threat of another pandemic wave and virus-related lockdown measures. Even if the vaccine is proven successful, it may still take months before it passes all the regulatory requirements and becomes publicly available. Manufacturing capacity, storage and transportation are future challenges too.

Moreover, analysts all over the world as well as at RSBL are warning that the selling pressure appears to be overdone as there is plenty of uncertainty and liquidity in the marketplace to support the precious metal.

And as we all know, the vaccine is not accessible to all right now. It is in its launch mode and hence exiting the market would not be advisable. In fact, when everyone can get a vaccine that is maybe when you want to sell gold, the bullion king of India, Prithviraj Kothari commented.

Moreover, even though the vaccine will be helpful in curbing the virus, but the damage that the virus has caused cannot be undone. World over, economies have suffered and it will take a good amount of time for them to recover.

There is still plenty of uncertainty to support gold’s new regime In addition, Trump refuses to concede defeat to Biden, mounting legal action against vote counting in states where he lost, adding an element of uncertainty to the political situation in the US. On Monday, Trump’s campaign filed a lawsuit to block government officials from confirming Biden’s victory in Pennsylvania.

After the initial optimism surrounding a possible vaccine receded, traders turned their focus towards a likely stimulus package being announced soon in the US. Biden’s recent victory in the presidential election has raised hopes for a larger corona virus relief package, which has boosted gold prices in turn.

The expansions of central banks’ balance sheets, alongside an ultra-low interest rate environment, have propelled a big rally in precious metal prices this year. This is because gold is commonly viewed as a good hedge against fiat money and a store of value. In the medium- to long-term, however, a slower pace of monetary easing and potential tapering may put gold at risk for a pullback.

• In the near term, many factors will be helpful to cushion the downside for gold prices-

• The need for a fiscal stimulus continues in the US

• Second wave of infections continue to hover the EU 

• The path to recovery for the EU seems to be fragile 

• The monetary environment is likely to remain accommodative in the foreseeable future to prevent systemic risk

All said and done, Uncertainties surrounding the post-election transition, pandemic, and a tepid economic outlook may also lift appetite for gold.