Contrary to wild predictions of an imminent rally towards $2,000 a troy ounce, gold actually lost significant value last week as part of the overall global market meltdown. For gold, this was the second slide in two weeks. The rapid spread of the dreaded coronavirus (Covid-19) and its disastrous impact on economic activities have cast a long shadow on global growth.

Ironically, the factors that many assume would propel gold higher as a safe haven asset in times of economic uncertainties have not been helpful. Even as there was a bloodbath in the stock markets around the world, the entire precious metals complex — gold, silver, platinum and palladium — melted in a manner not seen in recent times.

Punters’ eternal favourite, gold, lost a whopping 6 per cent, or over $100/oz, to trade at around $ 1,564/oz on Friday versus $1,674/oz a week earlier. The forced selling is attributed to cash requirements to meet margin calls in other markets, especially the equity market. Also, less-committed gold punters are the ones to flee the market at the first sign of trouble.

Dazzling rally

While die-hard gold bulls were blinded by the dazzling rally, they failed, as they do often, to recognise that the rally was build not on a solid base but on nothing but speculative froth that should sooner, rather than later, give way to reality.

Even an emergency 50 basis point rate cut by the US Federal Reserve failed to provide any marked relief to the yellow metal. In some sense, gold’s latest price decline was not unexpected. (See BL Commentary: ‘Collapsing gold has scope to tumble further’ March 1).

The week beginning Monday, March 16, will be crucial for the market whose focus will remain on the status and progress of the pandemic as well as stimulus measures of governments including further loosening of the monetary policy.

There is expectation that the US Fed will cut interest rates further by at least 25 bps or even possibly 50 bps. In other words, interest rates may tend towards zero. Talks of the possibility of another round of quantitative easing are also making rounds as well as some kind of fiscal stimulus.

If these expectations materialise, they may provide a cushion for gold from further fall which only means in the wake of ultra-accommodative monetary policy there will be more speculative capital flowing into various asset classes including equities and gold.

Demand compression

At the same time, the physical market for gold is enervated. There is clear demand compression. High local prices in China and India, two of world’s largest importers and consumers, discourage jewellery buyers. A lockdown in many Chinese cities and restriction recently imposed in several Indian cities is set to further constrict demand.

Reduced economic activity and possibly even loss of jobs may force some consumers to sell gold rather than buy. In other words, scrap supplies are set to increase.

Success in measures to contain the virus is critical. If decisive evidence comes in the next two months that Covid-19 has been controlled or contained, there is the strong possibility that stock markets and commodity markets will rebound in the second half of the year, especially given the low cost of money. In that event, too, gold is likely to come under downward pressure as its safe haven appeal will wane.

Tagging on to gold, silver lost $1.12/oz last week to trade at $15.74/oz on Friday, while palladium was the worst sufferer, having lost a whopping $720/oz last week to trade at $1,657/oz on Friday.

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

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