Gold's future looks bright

With uncertainty surrounding the world economy because of the coronavirus and crude oil price crash, gold prices have been a rollercoaster throughout the start of 2020.

Spot bullion is trading around $1 720 -- close to a more than seven-year high -- and is forecast by numerous banks to extend gains as the impact of the virus pushes economies toward recession and prompts action from central banks. Those factors are adding to what was already a strong outlook, with rising demand among middle-class consumers in China and India and signs of supply constraints, commented a top gold dealer in India.

On the other hand, the current crisis results not only from a negative supply shock but also from a negative demand shock pointed one of the bullion dealers in India. As a result of uncertainty, people cling to cash and forego unnecessary expenses. In addition, social distancing means reduced household spending on many goods and services, which exerts deflationary pressure. The most prominent example I would say is the recent crude oil price crash. The price has temporarily dropped below $0 a barrel (this was partly due to the contract for West Texas Intermediate crude). Lower fuel prices will translate into lower CPI inflation rate. Entrepreneurs, especially those with large stocks of goods, will probably lower prices to encourage shopping. Moreover, the appreciation of the US dollar means lower prices of imported goods.

Many of my peers at RSBL and industry friends are afraid that the coronavirus crisis will spur inflation. And they are right  After all, the increased demand for food and hygiene products raised the prices of these goods. Moreover, supply-side disruptions can reduce the availability of many goods, contributing to their increasing prices I am afraid.

The US CPI inflation rate declined 0.4 percent in March, following a 0.1 percent increase in February. It was the largest monthly decline since January 2015. The decrease was mainly driven by a sharp decline in the gasoline prices. However, the core CPI rate, which excludes energy and food prices, also decreased in March - by 0.1 percent (versus 0.2 percent rise in February), which was its first monthly decline since January 2010.

Gold prices consolidated around the $1,750 mark on Thursday, extending a recent pattern that has seen them rally on risk-friendly news and outperform on more bearish developments. spot gold  was up 0.6% at $1,724.45 an ounce, outperforming the futures contract after the U.S. Mint closed its West Point facility due to the coronavirus.

Havens were in favor again after another immense number for U.S. initial jobless claims, which fell only slightly from the previous week to 5.245 million. The U.S. economy has now lost more than 20 million jobs in a month due to the pandemic.

What will happen to gold irrespective of inflation or deflation? I would say Gold has always been a safe-haven asset and it does shine during both inflationary and deflationary periods. After all, gold also rallied in the aftermath of the Lehman Brothers' bankruptcy, when the economy plunged into deflation for a while. Why one would ask? Experts at RiddhiSiddhi Bullions Limited say that gold's price is also sensitive to market sentiment and risk aversion. Then, gold is no one's liability. So, when deflation is accompanied by significant economic worries and a loss of confidence in the US dollar, gold may shine. Anyway, gold's future - in a world of negative real interest rates, elevated risk aversion and high public debt - looks bright.

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.