Pumping of liquidity pumps up gold prices

The coronavirus, which emerged in China late last year, has turned into a global pandemic that has claimed lives of over 70,000 people and paralysed large wraps of the global economy.

From a spark in prices, gold did witness a minor correction as it dipped in March. According to the Bullion King of India; Mr Prithviraj Kothari, the decline in gold prices in March can primarily be attributed to two reasons.

• Investors were selling everything including equities, bonds and precious metals owing to the panic caused by an unprecedented non-financial hazard — the coronavirus — to global financial markets.
• Partial or full lockdowns by various governments to enforce social distancing in order to curb the spread of the virus, raised concerns about gold mining.

As per the sentiments of bullion dealers in India, gold continues to receive support as all central banks are trying to inject more liquidity into the system with their easy monetary policies.

FED- Fed has reduced the benchmark interest rate to zero.  A top official at the U.S. Federal Reserve on Sunday said the $2.3 trillion economic relief bill approved by Congress was appropriately sized and that a further relief effort may not be needed if support efforts are well executed.

The ECB and the Bank of Japan- they are maintaining a negative interest rate policy for a long time. Japan’s PM Shinzo Abe is set to declare a state of emergency soon as the number of confirmed cases in Tokyo soars past the 1,000 mark. In addition, things remain tense in Britain with the death toll nearing 5,000 even as PM Boris Johnson gets hospitalized due to coronavirus. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies


However, post the dip in gold prices in March, the precious yellow metal regained momentum after President Donald Trump told U.S. citizens to prepare for “very, very painful two weeks” on Mar 31. Moreover, weak economic data dented market participants' confidence, commented one of the top gold dealer in India.


Gold prices rallied to erase three-quarters of this week's earlier $60 drop Thursday in lunchtime, rising to $1612 per ounce as US stock markets rose despite weekly claims for jobless benefits setting their second new all-time record in a row amid the fast-worsening Coronavirus Crisis.

The initial jobless claims by the Americans skyrocketed to a historic high of nearly 10 million for two consecutive weeks ended Mar 21 and Mar 28. The United States has never lost more than 1.4 million jobs in any two successive weeks in its history. Moreover, U.S. auto sales declined to 11.4 million in March from 16.7 million in February.


After rising steadily for 113 consecutive months, job creation in the US witnessed a contraction during the month of March, with the US economy registering a loss of 701k jobs because of the shutdown of workplaces and factories across the country. This boosted the safe-haven appeal of gold as markets worry about the economic fallout from the pandemic and the rising risks of an upcoming recession not just in the US economy but also in the global economy.

However, gains in gold remained limited as the US dollar continued to make gains as a preferred safe haven currency despite the weak economic data from the US. The dollar shares a negative correlation with gold as a higher dollar makes it more expensive for holders of non-dollar currencies to purchase gold.
From a long term standpoint, gold will still remain the preferred asset as the environment of low-interest rates and virus-induced global slowdown would support a prolonged rally.

While equities tend to dominate the headlines, it has been the star performer of the past two decades. The graphic below shows how gold has outperformed both the Down Jones and the US Dollar since 2001. Gold is up 498% compared to the Dow up 98% and the dollar down 81%. Gold indeed remains a favourite

Gold continues to be in wait-and-see mode on how bad the global economy will get and how long will the depression-like conditions last.

Most traders would expect gold to be higher, after the payrolls data but “gold’s problem is that supply tightness is easing, and the dollar continues to grind higher. Ultimately gold will shine from the entire fiscal and monetary stimulus being pumped into markets globally.

The aggravation of coronavirus pandemic with each passing day has left investors scurrying for safe-haven assets as they remain apprehensive regarding the recovery of global economic growth and its consequent impact on stock markets. This, in turn, has triggered a demand for gold, which is considered as a key investment option during times of financial turbulence.

Gold fights back as the world fights back COVID-19

Over the past few weeks, Covid-19 has reached into the pandemic stage globally, and is creating havoc not only medically but also economically. We have seen Covid-19 evolve from a predominantly Chinese outbreak to a global crisis. As of 1^st April, 2020, there have been nearly 859,929 confirmed cases and over 42,000 deaths across 203 countries, and these numbers continue to increase on a daily basis. Although China remains the hardest-hit country in absolute terms, relative to its population, more than 20 countries, most of them in Europe, have now surpassed it, the most affected being Italy.

Italy, Spain and France have already implemented aggressive containment measures that will undoubtedly affect their economies. Other nations may well follow suit, while individuals are also likely to increasingly exercise caution in their day-to-day activities.

Against this backdrop, further pressure on global growth seems inevitable. Investor anxiety towards that prospect will likely intensify this as far as market moves are concerned. In this environment, gold’s downside will at the very least be supported. Eventually, we expect a healthy rebound to appear, as the appetite for safe haven assets remains strong.

While China is back on its path of recovery and has finally announced movement of flights and opening of lockdowns, still world over countries continue to struggle this medical monster that has been one of the most lethal virus of all times.

According to the World Health Organisation, concerns about Covid-19’s ability to continue spreading have sent shock waves across markets. Equity prices around the world have suffered sharp declines and bond yields in key markets have collapsed to all-time lows. Industrial commodities have also come under pressure.
As a result, authorities in a number of countries have either implemented or promised monetary and fiscal interventions, which at times have offered some support. In spite of such efforts, risk aversion has continued to spread. Most notably, the 50 and 100 bps cuts by the US Federal Reserve on March 3 and March 15 respectively have done little to help US equity prices.
For a while, gold was one of the few beneficiaries, as investors have looked for safe haven assets to help diversify their portfolios. Since the beginning of February, gold exchange-traded fund (ETF) holdings have increased by more than 100 tonnes and in the first half of February, money managers’ net positions in Comex futures rose by nearly 180 tonnes, although more than a third of that was later sold off.
In turn, this fuelled a rally to a peak of $1,703, a level unseen since before the 2013 liquidations. Meanwhile, gold prices denominated in euro as well as a number of Asian currencies reached all-time highs.
But gradually as other markets crashed, we saw investors selling gold, in order to cover up losses made elsewhere. As panic selling eventually spread across all asset classes, safe haven assets also experienced heavy liquidations. Bond yields rebounded and gold prices collapsed.
Gold prices retreated again on Tuesday under pressure from end-of-quarter repositioning, but also from the awareness that emerging market central banks, having been keen buyers of gold in recent years, now have to push more out into the market to defend their currencies.
Gold prices dropped as much as 2.4pc on Tuesday as the dollar strengthened and strong Chinese economic data boosted risk appetite but bullion was heading for a sixth straight quarterly rise amid fears over a global shutdown due the coronavirus.
The combination of a strengthening dollar and better risk appetite is weighing on gold. The dollar index rose 0.8pc after posting a nearly 1pc gain overnight, as Japanese investors and companies rushed to cover a greenback shortage before their fiscal year ends.
Central banks around the world have announced major fiscal and monetary packages to try to limit the economic damage, as governments have extended lockdowns to combat the virus.
Major central banks moves seen this week-

• The Central Bank of Ecuador said it had raised $300 million through a one-month gold swap which involved pledging 240 thousand ounces of its reserves.
• On Monday, the central bank of Russia confirmed widely-held expectations in saying it would stop buying gold from domestic producers on April 1, a move that will bolster its reserves as it fights to stop the ruble depreciating too fast against the dollar and euro.
• The CBR had already cut its purchases by around 40% last year as gold prices rallied to multiyear highs.
• Strong Chinese factory data lifted world stocks on Tuesday but markets were heading their worst quarter since 2008, on jitters about the economic hit from the coronavirus

A further factor weighing on gold Tuesday was a second-straight day of gains for the dollar as it recovered its poise from last week’s selloff. A strong dollar drives up the price of gold in local currencies worldwide.
However, it is important to stress that even after these corrections, gold continued to significantly outperform other asset classes, most notably equities, where most major markets have suffered double-digit declines year-to-date.
Looking ahead, we believe the Covid-19 outbreak is likely to continue affecting global markets and, by implication, precious metals, at the very least for the next few weeks and likely the next two to three months. Although the rate at which confirmed cases are growing has slowed down significantly in China, it is accelerating across some key Western economies, notably the United States, Italy, France and Germany.
With central banks unleashing a tsunami of quantitative easing (QE) at a time when fear is running rampant in markets and (as) government debts are about to explode, it seems like the perfect cocktail that could push gold back to record highs.