Is the massive sell-off in precious metals an aberration?

G Chandrashekhar | Updated on September 25, 2020 Published on September 25, 2020

There is a massive sell-off in the precious metals market from the beginning of this week. Silver is the worst hit having lost close to a fifth in value in just four days to trade below $22 an ounce. Gold is facing an embarrassing setback falling to a two month low of $1,850/oz.

Platinum and palladium, too, have not been spared with the former down by $100 and the latter by $200 an ounce this week. These are unusual times for the precious metals complex as not much seems to have changed in the overall environment of risk and ultra-expansive monetary policy. It is argued that there is forced selling by investors in order to generate liquidity.

A significant driver of price performance is the appreciation of the US dollar. Experts are actually divided on the reasons for a surge in the dollar despite uncertainties surrounding the US economy. Multiple reasons are being proffered including the risk of a lockdown in Europe given the rise in virus infections and its impact on the euro, uncertainties relating to the US presidential elections and of course the US interest rates.

After surging from March to August and breaching the psychological $2,000 barrier, gold now finds itself under pressure with a decline of $100 in value in the last four days. Many market pundits are flummoxed by the aberrant behaviour of the precious metals complex.

While gold continues to attract ETF inflows, silver ETFs are witnessing massive outflows from the beginning of this month estimated at about 750 tonnes. This is neutralising all accruals of the last two months. Such withdrawals are seen putting additional pressure on silver prices.

Notwithstanding the current sell-off, gold has the potential to bounce back as the positive risk-off environment has not changed. The risks relating to the pandemic have not gone away. Recovery in economic activity will be gradual. Importantly, the monetary policy is expected to continue to remain extremely accommodative the whole of 2021 if not till 2022.

Investment tool

Gold does not generate any income. However, its attractiveness as an investment asset is determined by real yields on competing assets such as US Treasuries. As the real yields drift lower it could weigh on the dollar which, in turn, will mean precious metals in general and gold in particular will benefit.

It is another matter that the physical demand for the yellow metal is anything but robust. Imports into two of the world’s largest consuming markets leave much to be desired and are markedly weaker than usual. But currently this market is not about physical demand but about demand from financial investors.

Reflecting global trends, gold has dropped below the psychological ₹50,000 per 10 grams in India; but that means nothing for physical consumers. Jewellery demand is too weak, especially given the fact that economic activity is yet to gather pace and huge job and income losses are a reality.

Gold has the potential to reverse the current falling streak and rise towards $2,000/oz as we move towards the end of the year. It will continue to be a financial investment play.

The writer is a policy commentator and commodities market specialist. Views are personal.

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Published on September 25, 2020
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