Time to keep a watch on gold supply disruption

Gold has been shining all the way, ever since Covid-19 became a pandemic. There was great volatility witnessed the world over, wherein prices climbed to their highest level since 2012.

Though we did see gold prices moving a bit lower during the past few weeks, the virus scare kept the rally in gold alive. On one side gold is being considered as a safe haven asset and on the other side, it is being oversold in order to cover up the losses incurred in the stock market, commented a  top gold dealer in India. It’s being pulled from both the sides.

The Covid-19 outbreak has had a major impact on the gold market, bringing massive price swings as investors react to new developments related to the pandemic.

The World Health Organization officially declared Covid-19 a pandemic on March 11, but gold prices didn’t immediately rally as many expected, even as the hit to the global economy became apparent with the closure of schools and businesses around the world.

That’s because gold generally goes through a shakeout of weak hands before reaching new highs.

Currently, the U.S dollar is considered the strongest fiat currency, while gold has broken out into new all-time highs against the other currencies.

Gold had reached an all-time intraday high of $1923.70 on September 6, 2011. Last week, on Thursday, gold was just $171 an ounce away from this high as it settled at $1752.80.
Gold did drop a bit on Friday, but it still remained very well supported.

We saw a lot of pumping in during the week by major world economies-

• In a bid to keep the economy afloat amid the outbreak, which had forced 16.8 million Americans to file for unemployment benefits since the week ended March 21; the Fed on Thursday announced a broad, $2.3 trillion stimulus package.                                                         
• European Union finance ministers also agreed on half-a-trillion Euros worth of economic support but left open the question of how to finance recovery in the bloc headed for a steep recession.

Subject experts at RiddhiSiddhi Bullions Limited stated that any form of stimulus attracts gold. It improves the opportunity cost for holding the yellow metal.

Meanwhile, major physical bullion dealers in India saw activity dwindle last week due to coronavirus-led restrictions, with strained supply chains cut off from soaring safe-haven demand in some regions.

Supply disruptions have been a growing worry as governments around the world are shutting down businesses deemed as nonessential. Three of the world’s largest gold refineries—Valcambi, Argor-Heraeus and PAMP—have suspended production in Switzerland for at least a week on the back of mandatory closure of nonessential industry in the country to prevent the spread of coronavirus, said a senior-level executive at RSBL.

The problem is there are logistical issues moving metals around, so you cannot satisfy supplies of gold from one area and bring to another
The hunt for existing gold supplies in the near-term threatens to create significant issues with various markets that cannot connect with one another easily. There’s the possibility here of longer supply chain disruptions, which will make the odds grow that more interest in existing Comex inventories will be demanded. Even we at RisddhiSiddhi Bullions are finding it difficult to move around RSBL Gold.

Currently, we don’t see economies reviving up that fast, at least not for the current calendar year. A hold above $1,700 would be very constructive in terms of giving [gold] a boost up to the all-time highs. Hence there could possibly be an acceleration in buying pressure on gold. All said and done, it is a great time to buy gold equities which were sold off with general equities in the rush to meet margin calls.

Meanwhile, in the domestic markets, especially the prices shall keep reflecting higher growth in gold compared to Global Comex as the depreciating rupee factor shall play a role.

The rupee which was trading at Rs72/$ odd average rate in March has spiked to an average rate to Rs 74-76/$ levels which indicates that the price of USDINR pair shall keep giving support to the yellow metal despite a global fall.

I believe that one should allocate at least 25 percent of your portfolio in Gold ETFs, and another 30 percent in cash till a cure for COVID-19 is found, or lockdown is removed.

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.