The path to recovery will be gradual

We have seen that gold has been moving sideways since early April taking everyone including the top gold dealer in India on a ride. It is trading above Feb-March highs, but it looks like a consolidation within a medium-term uptrend for the yellow metal.

On one side it has managed to cross some important levels, on the other side it’s struggling to hold above the measured base objective at $1700/05/ Moreover, the upside momentum is weakening near-term and the threat of a consolidation phase is growing.

The main reason for this kind of behaviour in gold as suggested by the Bullion king of India, Prithviraj Kothari is the on-going USD funding crunch that is holding financial markets hostage at the moment. As a result, gold was sold off alongside the equities melt-down as global investors rushed to raise cash in order to make up for the losses.

But if we see the longer perspective, we can say that once this USD funding crunch dissipates after 2Q, gold should respond well to the massive amount of global monetary policy easing. By then, there is significant default risk as the global economy slows down drastically. Hence, gold’s safe haven role should return with a vengeance. Furthermore, recent global lockdowns have resulted in a shortage of physical gold as global transportation links get cut. As such, we would expect Gold to rebound significantly in the quarters ahead giving bullion dealers in India reassurance.

But currently, the broader picture speaks about world economies especially US. The global GDP is down almost 3.5-4%. Though the situation wont remain the same forever, but one thing is clear is that the path of recovery will be gradual and that it is going to be very hard for the next few quarters, at least across all the commodities, with maybe gold being the exception .

One more thing that catches attention is gold supply. Of late, mining capacity has suffered a setback due to COVID 19 and the lockdown situations globally. We all know that in times of uncertainties, demand for the yellow metal rises says Riddi Siddhi Bullions Limited. The same is going to happen soon but physical availability of gold is limited.
We've seen central bank buying and with interest rates the way they are, and the investment demand and the bullion side and ETFs being extremely strong, it could very well be very hard to source physical gold to where it's needed.

But with interest rates and carry costs the way they are, keeping gold in vaults will make a lot of sense, people will buy it as a hedge and insurance, and therefore there might be some scarcity that we haven't really seen before, where the flows from vaults into the physical market would not occur as readily.
Hence we can say the slowly growing economies, increased demand and restricted supply, combined together will play a pivotal role in influencing gold prices.

What is clear is that COVID-19 has resulted in sudden falls in global economies and commodities markets, with supply disruptions on a global scale never witnessed before. The resulting shockwaves have produced a great deal of uncertainty in terms of the future global growth outlook, and this includes the outlook for commodities.

Gold continues to remain in demand

Last week passed in a much quiet phase for the world. It was rumoured that North Korean President was unwell, but later his spokesperson confirmed that he is alive and in good health. While crude did not receive much good news pertaining to demand and overflow, gold had a pretty stable week and an amazing monthly rally as gold began its journey at $1590 and gained nearly 8-9%, touching $1730 on Thursday.

Gold has continued to play its role as a safe haven, as central banks and governments have announced massive amounts of support for economies in lockdown, but this should now be in the price.

While the broader macro backdrop remains supportive for gold prices in the near term, real yields are being tracked more closely. Safe-haven buying has continued to support gold primarily through ETF inflows and continued retail investor demand. So if we see different economies starting to reopen, we might see some of that safe haven demand starting to ease.

U.S. unemployment is at a totally unprecedented, and unpredicted, 16.5 % of the workforce and may yet rise further, although moves to re-open a very limited section of the economy could mean this could soon be stagnating. On one side there is optimism the US economic figures will improve, but on the other side there is fear that the virus may not get contained and can spread further.

The U.S. economy tends to be the driver for the rest of the world but world virus data is at least equally alarming. Globally total COVID-19 known infections have already hit 3 million, with more than 210,000 deaths.  True, Asian and European figures – and even those in the U.S. - could already have peaked and be beginning on a downwards path, but the virus incidence in Africa and parts of Central and South America, where health systems are supposedly less able to cope with the virus spread, may only just be beginning.

 There’s also a chance of a second wave of infections if, and when, lockdown measures are eased, or if there is resurgence in the northern winter months.  COVID-19 is likely to be with us for some time yet and poses an enormous continuing threat to the global economy and to what we consider to be our normal way of life.

Prithviraj Kothari says that Investors now shift their focus to a U.S. Federal Reserve meeting ending on Wednesday and a European Central Bank (ECB) meeting on Thursday as major central banks once again take the stage as the global economy grapples with blows inflicted by the COVID-19 outbreak.

Even when the lockdown is lifted, the world will still be far from any kind of normality. The bigger risk then is economic collapse which brings in tension for the bullion dealers in India. But gold tends to benefit from widespread stimulus measures as it is often seen as a hedge against inflation and currency debasement.

Any kind of recovery will be gradual and gold will benefit from this prolonged phase of weakness which gives the top gold dealer in India reassurance. Economic indicators reveal that the numbers won’t be pleasing and that after lock down is eased we might face an economic collapse. We very well know that governments around the world are doing their best to spend parallel sums of money to boost the economy. Central banks have been pushing enough stimuli to keep the markets alive.

And hence even in the long term, Gold should remain in demand as a crisis currency in this environment which makes the future brighter for the yellow metal says RiddiSiddhi Bullions Limited.