Growing potential for gold to cross $1800

Gold opened on a positive note this week, as US President Donald Trump threatened to impose more tariffs against China over the coronavirus pandemic, which Trump alleged originated from a lab in China.

The uptick in geopolitical risks is the primary catalyst due to renewed US-Sino tension after the White House put China in the crosshairs. On Friday, after a White House press conference, President Trump said that he had a high degree of confidence that the Covid-19 pandemic originated in a laboratory in Wuhan, while simultaneously threatening sweeping tariff retaliation towards China.

Post Mr. Trump’s statement, fresh trade tensions began to haunt global market. It raised the safe haven appeal for gold all over again. In fact Trump and other government officials restated their allegations that China failed to alert other countries about the pandemic in time and was responsible for the rampant spread of the virus worldwide. Trump stated last week that he was exploring ways to retaliate against China for spreading the virus globally and hiking tariffs was one option under consideration.

Moving onto Covid -19 and how the path of recovery would be. Gold has also turned bullish after Fed officials highlighted long-term risks to economic recovery if the US is not careful about resuming economic activity in the aftermath of the pandemic. Despite rolling out several stimulus measures, the US central bank has hinted that it could unveil more efforts to support economic recovery in the US, a sign that once again serves to boost the safe haven appeal of gold.

Gold has also gained on the back of disappointing economic data releases from Japan in the Asian session, with Tokyo’s consumer prices experiencing the first decline in three years during April. Meanwhile, the Japanese manufacturing sector continues in contraction on account of the coronavirus pandemic.

The COVID-19 pandemic has brought a pause to economic activity around the world. The coronavirus crisis has killed hundreds of thousands, incapacitated millions and affected the livelihoods of billions, prompting policy makers to fear a deflation spiral reminiscent of the Great Depression

The US, a key driver of the global economy, now accounts for a third of global infections and deaths related to COVID-19, exceeding 1 million infections and 60,000 deaths. US jobless claims have already exceeded 30 million, driving unemployment to 15% or higher. This data has propelled the gold price remains high. The unprecedented fiscal and monetary expansion by governments and central banks has boosted investment demand for gold, as liquidity floods the financial markets and reduces the opportunity cost for gold investors.

The interest rates close to zero continue to favour the upside for gold by keeping real rates in negative territory for now. Gold faces serious demand headwinds from a lack of consumer spending in China and India, but healthy investor appetite is propping up demand at present.
That comes as investor interest continues to grow in this environment of uncertainty and negative real rates. And in these situations, gold always becomes an investors favourite says Bullion King of India.

As the scale of the pandemic — and its potential economic impact — started to emerge, investors sought safe-haven assets.
Large government expenditure to stimulate “flagging economies” hit by Covid-19 has raised concerns over debt in a future without the virus.
Steps needed to keep workers safe will mean even businesses that are able to restart production will generally be running at low capacity, and most will be operating in an environment of greatly reduced demand.

Last week, the World Gold Council released its first quarter 2020 demand trends report for the precious metal, where it highlighted that the global coronavirus outbreak was “the single biggest factor influencing gold demand. Bullion dealers in India are certain that this might not drastically affect gold. Rather gold is becoming attractive in this environment where uncertainty is very high, growth is expected to weaken, and at the same time you have negative real rates which make gold attractive to hold as a diversifier in investor portfolios and good news for top gold dealers in India.

Gold is strengthening as stocks pull back amid concerns about “restarting” many states amid the COVID-19 pandemic and with markets even more concerned with the U.S. hardening its stance against China again, with the threat of tariffs that could derail Chinese purchases. Amidst all this there’s “growing potential” for the price of gold says RiddiSiddhi Bullions Limited to break $1,800 per ounce.

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.