Gold Might Come On For Profit Taking

It has been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year, despite the sharp correction in precious metal prices last Friday.

Onto these wild market swings and uncertainty, gold once again provided a safe haven against emerging turmoil. The biggest weekly gain since 2009 took it to levels not seen for seven years, leaving both silver and platinum trailing in the process.

The coronavirus outbreak has worsened to now more than 95,000 infected worldwide and has spread globally. The threat of the coronavirus on global economic growth has now impacted all asset classes, global trade, liquidity and central bank policies.

It was in mid-February when the severity of the economic impact of the coronavirus began to be reflected by major companies, such as Apple when it provided earnings warnings. For several weeks major parts of China were locked down (closing businesses) to contain the outbreak. The impact was a reminder of how important China is in the global supply chain and its impact on global growth. Yields fell, yield curves flattened and inverted inflation expectations rolled over and commodity prices collapsed.

The negative economic impact of the coronavirus that for weeks has been signalled through weakness, finally spread like a wildfire to the rest of the market. The week kicked off with an emergency 50bp rate cut by the U.S. Federal Reserve, a move that only strengthened the sense of panic in the market. Within a few days, global sovereign bond yields had collapsed to a record low, gold and stock market volatility spiked while the dollar came under some significant selling pressure as longs were exited.

On March 3, the U.S. Federal Reserve (the "Fed") made a surprise emergency cut in interest rates taking the Fed Funds rates down 50 basis points to a range of 1.00%-1.25%. The rate cut made an immediate, positive impact on gold bullion and gold equities.

The emergency rate cut from the U.S. Federal Reserve on Monday, is, according to market expectations, likely to be followed by another 50 bp cut at the regular FOMC meeting on March 18. So far, the low point stands at 0.20% which could be reached before the November U.S. elections.

A perfect storm of supporting factors drove gold’s rally and outperformance. Safe haven demand aside, it was the collapse in U.S. 10-year real yields to -0.60%, a seven-year low, sudden dollar weakness - as yield spreads to other currencies collapsed - and continued stock market weakness.

There is a clear rush to safe haven assets at the moment and gold is a major beneficiary of this situation. Monday trading saw another blood bath emerge on global stock markets.

Where the world is just trying to accept the impact this virus has created all over, another shock to the global markets was the breakdown of relations across the OPEC+ group.

As if corona virus panic was not enough, this was an add-on to rock investor confidence world over. Fears that waves of oil from Saudi and Russian wells are about to hit the market- has provided a sucker punch to market sentiment.

The ultimate safe haven asset in these troubled times is clearly gold. Its sentimental qualities are eternal, while the hard currency’s role as a hedge against inflation makes is a particularly attractive asset to buy today, Central banks have already been loosening monetary policy like crazy to support global growth over the past year. More stimuli is coming down the line following the Fed’s interest cuts of last week to offset the impact of the coronavirus, too.

That is why if you get a dip in gold prices, add to it. Dedicating your entire portfolio to one particular asset is not a wise decision. In fact, I, would rather advise investors to allot around 10-15% of their portfolio in gold so that it becomes a hedge tool.

It’s a different world altogether now. There is collateral damage on most risk portfolios and the lone survivor of gains is fold which is nearly up 12 % on global futures and 17% on local futures markets. So gold will keep on coming for massive profit taking if funding losses of other assets is needed.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.

Emergency Rate Cut Pushes Gold Prices Higher

After getting caught up in last week’s punishing virus-driven sell-off, gold is seeking to refresh its haven credentials. The metal advanced after a weekend of negative developments, including a surge in virus cases around the world. With rising expectations that central banks will now act, Friday’s big slump in gold was put down to investors’ forced selling to cover losses elsewhere.

Bullion is always considered the safest mode of investment during crisis. Given that, investors tend to sell gold, as prices rise, during extreme turmoil, in order to cover-up losses incurred elsewhere. Similar pattern was seen last week where gold was sold off heavily, a situation that was last seen significantly during the 2008 financial crisis.

Gold prices plunged over 4.5% on Friday, with precious metals joining a broader market selloff as investors liquidated positions to meet margin calls in other assets.

Investors were cashing out to cover losses and meet margin calls in other markets. This does not mean that investor attitude towards gold has changed or that investors have started losing faith in the yellow metal. Gold is still perceived as a safe haven asset and shall continue to do so.

And we did not have to wait too long to prove it. After witnessing a drop in prices on Friday, gold bounced back on Monday, as it rose 1 percent.

Even equities had rallied initially  as the Bank of Japan followed the US Federal Reserve in vowing to take action to stem the impact of the novel coronavirus, with Tokyo launching a new raft of bond purchases and continuing to buy stock-market ETF funds.

Bank of Japan Gov. Haruhiko Kuroda said the central bank would take steps to steady markets, and bolster liquidity through short-term lending operations and asset purchases. On Friday, Federal Reserve Chairman Jerome Powell issued a rare, unscheduled statement, emphasizing the central bank’s intention to act appropriately to address the risks posed by the coronavirus.

A second death from the virus in the U.S., has raised fears of a wider spread of the disease domestically and investors are starting to believe that the Fed and other central banks will act to tamp down expected economic shocks from COVID-19, the infectious disease that originated in Wuhan, China late last year and has rapidly spread across the globe.

The global death toll from the illness stands at more than 3,000, and deaths in China stand at 2,900, according to recent reports.

The coronavirus outbreak continued to take its toll on activity as China reported more than 78,800 infections with almost 2,800 deaths so far. Concerns about the global economy mounted as the virus spread in other countries.

 Gold rose more than 1% on Monday, rebounding from a steep decline across precious metals, amid investor hopes the U.S. Federal Reserve will cut interest rates to cushion the impact of the fast-spreading coronavirus.

Expectations for a Fed interest rate cut at the March 18 meeting are rising “and gold’s appeal as a safe haven is still strong” as the likelihood of “further coronavirus problems and upcoming political headlines in the U.S., Israel, South America, Greece, euro zone and Middle East worries are still intact.”

Fed Chair Jerome Powell said that while the U.S. economy remained strong, the coronavirus “posed an evolving risk” and the central bank stood ready to take action if needed.

Following Fed chairman Jerome Powell's statement that the US central bank will "act as appropriate" as the virus poses "evolving risks" to the economy, markets were expecting a certain rate cut when the policy committee would meet on March 17-18

But what happened on Tuesday took the markets by a sudden shock.

Gold prices rose on Tuesday after the Federal Reserve announced an emergency rate cut Tuesday of half a percentage point in response to the growing economic threat from the novel coronavirus.

Spot gold was up 3.3% at $1,643.85 an ounce, having gained more than 1% in the previous session. U.S. gold futures firmed 3.1% to $1,644.10.

The move was the first such cut since the financial crisis. It comes amid a volatile patch on Wall Street and amid a steady stream of pressure from President Donald Trump, who has called for lower rates to stay competitive with policy at other global central banks.

Expectations of rate cuts by the Fed and negative yields in the euro zone, Switzerland and Japan have supported gold prices. Not from a safe haven point of view, but because at least gold does not charge a penalty (which negative-yielding currencies do). So, gold rallied with stocks because at the time it was a risk-on investment.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.