Gold fights back as the world fights back COVID-19

Over the past few weeks, Covid-19 has reached into the pandemic stage globally, and is creating havoc not only medically but also economically. We have seen Covid-19 evolve from a predominantly Chinese outbreak to a global crisis. As of 1^st April, 2020, there have been nearly 859,929 confirmed cases and over 42,000 deaths across 203 countries, and these numbers continue to increase on a daily basis. Although China remains the hardest-hit country in absolute terms, relative to its population, more than 20 countries, most of them in Europe, have now surpassed it, the most affected being Italy.

Italy, Spain and France have already implemented aggressive containment measures that will undoubtedly affect their economies. Other nations may well follow suit, while individuals are also likely to increasingly exercise caution in their day-to-day activities.

Against this backdrop, further pressure on global growth seems inevitable. Investor anxiety towards that prospect will likely intensify this as far as market moves are concerned. In this environment, gold’s downside will at the very least be supported. Eventually, we expect a healthy rebound to appear, as the appetite for safe haven assets remains strong.

While China is back on its path of recovery and has finally announced movement of flights and opening of lockdowns, still world over countries continue to struggle this medical monster that has been one of the most lethal virus of all times.

According to the World Health Organisation, concerns about Covid-19’s ability to continue spreading have sent shock waves across markets. Equity prices around the world have suffered sharp declines and bond yields in key markets have collapsed to all-time lows. Industrial commodities have also come under pressure.
As a result, authorities in a number of countries have either implemented or promised monetary and fiscal interventions, which at times have offered some support. In spite of such efforts, risk aversion has continued to spread. Most notably, the 50 and 100 bps cuts by the US Federal Reserve on March 3 and March 15 respectively have done little to help US equity prices.
For a while, gold was one of the few beneficiaries, as investors have looked for safe haven assets to help diversify their portfolios. Since the beginning of February, gold exchange-traded fund (ETF) holdings have increased by more than 100 tonnes and in the first half of February, money managers’ net positions in Comex futures rose by nearly 180 tonnes, although more than a third of that was later sold off.
In turn, this fuelled a rally to a peak of $1,703, a level unseen since before the 2013 liquidations. Meanwhile, gold prices denominated in euro as well as a number of Asian currencies reached all-time highs.
But gradually as other markets crashed, we saw investors selling gold, in order to cover up losses made elsewhere. As panic selling eventually spread across all asset classes, safe haven assets also experienced heavy liquidations. Bond yields rebounded and gold prices collapsed.
Gold prices retreated again on Tuesday under pressure from end-of-quarter repositioning, but also from the awareness that emerging market central banks, having been keen buyers of gold in recent years, now have to push more out into the market to defend their currencies.
Gold prices dropped as much as 2.4pc on Tuesday as the dollar strengthened and strong Chinese economic data boosted risk appetite but bullion was heading for a sixth straight quarterly rise amid fears over a global shutdown due the coronavirus.
The combination of a strengthening dollar and better risk appetite is weighing on gold. The dollar index rose 0.8pc after posting a nearly 1pc gain overnight, as Japanese investors and companies rushed to cover a greenback shortage before their fiscal year ends.
Central banks around the world have announced major fiscal and monetary packages to try to limit the economic damage, as governments have extended lockdowns to combat the virus.
Major central banks moves seen this week-

• The Central Bank of Ecuador said it had raised $300 million through a one-month gold swap which involved pledging 240 thousand ounces of its reserves.
• On Monday, the central bank of Russia confirmed widely-held expectations in saying it would stop buying gold from domestic producers on April 1, a move that will bolster its reserves as it fights to stop the ruble depreciating too fast against the dollar and euro.
• The CBR had already cut its purchases by around 40% last year as gold prices rallied to multiyear highs.
• Strong Chinese factory data lifted world stocks on Tuesday but markets were heading their worst quarter since 2008, on jitters about the economic hit from the coronavirus

A further factor weighing on gold Tuesday was a second-straight day of gains for the dollar as it recovered its poise from last week’s selloff. A strong dollar drives up the price of gold in local currencies worldwide.
However, it is important to stress that even after these corrections, gold continued to significantly outperform other asset classes, most notably equities, where most major markets have suffered double-digit declines year-to-date.
Looking ahead, we believe the Covid-19 outbreak is likely to continue affecting global markets and, by implication, precious metals, at the very least for the next few weeks and likely the next two to three months. Although the rate at which confirmed cases are growing has slowed down significantly in China, it is accelerating across some key Western economies, notably the United States, Italy, France and Germany.
With central banks unleashing a tsunami of quantitative easing (QE) at a time when fear is running rampant in markets and (as) government debts are about to explode, it seems like the perfect cocktail that could push gold back to record highs.

Gold Still Remains An Investors Favourite

It was like a sabbatical for me as I write after a fortnight. There was too much volatility in the markets where prices were just swinging. Varied reasons being responsible, I actually wanted to take time out, analyse the global scenarios and then put across my inputs on gold’s behaviour.

Last week we saw unprecedented government action to get on top of the developing COVID-19 situation in Australia to avoid what we have seen in other countries. Not surprisingly, the combination of continuing falls in financial markets across all asset classes, societal restrictions and talk of further controls had investors running to safety.

Globally we witnessed acceleration in volumes and this has been the case across the whole physical bullion industry talking to our many contacts.

What has confused many is that they can see the massive demand for physical gold and silver while at the same time the price of the metals has fallen – at least in US dollars. The volatility in the spot price reflects a battle between the physical market and paper desk traders and trend following algorithms.

Last week there were a lot of articles that were similar to those back in the global financial crisis – stories about shortages and that the physical market and the paper market are, or have, disconnected.

The driver behind those stories has been the reality of physical products selling out and going on back order along with increases in premiums. This has been particularly the case in America, which has this week only really woken up to the threat of COVID-19 - resulting in increased demand for physical gold and silver.

The stand-out country at the moment is the USA which is paying a terrible price for the apparent downplaying of the virus in its early stages by President Trump, who as recently as February 28th referred to the virus incidence in the U.S. as a hoax, and saying the virus would miraculously go away.  No doubt many Trump believers thus treated any dire warnings of the pandemic as hugely overblown.  Now we are in a situation where the U.S. is the third most affected country in the world and if the virus spread continues at its current rate could even overtake China as the world’s most affected nation within a month.

The entire world is now aware or rather panic about the deadly virus. This panic is creating significant movement in the precious metals market.

Precious metals have seen price falls along with the equities markets, but in the case of gold not nearly to the same extent.  It keeps on being taken down below the $1,500 psychological level, but so far has invariably bounced back  Year to date the yellow metal is down around 1% while U.S. equities for example are down around 35% over the same period.  But this price fall is in U.S. dollars.  In most other countries, due to dollar strength, gold is close to all-time highs in domestic currencies and is thus serving extremely well as a wealth protector in these nations – indeed in most of the world.

Like most asset classes, gold is being affected by the unprecedented economic and financial market conditions in play around the globe. We believe that recent volatility in the gold price has been driven by massive liquidations across all assets, and likely magnified by leveraged positions and rule-based trading.

Gold has also likely been used to raise cash to cover losses in other asset classes because:

• it remains one of the best performing asset classes year-to-date, despite recent fluctuations
• it is a high quality and highly liquid asset, trading over US$260 billion (bn) per day in March

Looking ahead, we believe the deceleration in economic growth will undoubtedly impact gold consumer demand and gold’s volatility may remain high, but high risk levels combined with widespread negative real rates and quantitative easing will be supportive of gold investment demand as a safe haven.

But what we need to really know is that Why did the gold price drop alongside stocks?

The answer is linked to several factors. The most prominent of these is the massive liquidation virtually all asset classes experienced in the past week. And gold was no exception.

Even longer-term US treasuries prices fell, despite a second unscheduled cut by the Fed on 15 March slashing the Fed funds rate to pre-2016 levels. The 10-year US treasury yield is trading above 1% after reaching a historical low of 0.33% on 9 March.

As a high quality, liquid asset gold may also have been used to raise cash.

It may take a while for financial markets to stabilise. Amidst high volatility, the gold price may experience additional swings, but the long-term implications of an environment combining high risk and lower opportunity cost should support gold investment demand.

We also expect central banks to remain net gold buyers overall, albeit likely not at the same rate as in the past two years.

Bullion is set for back-to-back weekly losses for the first time since September after the dollar hit a record, although its drop was pared Friday as investors took stock of the outlook for the global economy, the spread of the disease, and looser monetary policy. With deep losses in risk assets this month, some investors have been forced to sell gold to raise cash. A similar pattern -- losses at times of extreme market stress -- was seen in bullion at the onset of the global financial crisis in late 2008, before it went on to peak in 2011.

These major crashes show that Gold and silver eventually respond to the crisis of the time and prices ultimately soar.

You’ll notice this occurred during periods of both inflation and deflation. While they both tend to do better in inflation, they ultimately rose in response to crisis.

This of course is what we have on our hands now. History says that despite the current selloff in gold and silver, the crisis will draw in more and more investors and as a result, eventually impact their prices in a major way.

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