Gold & Silver

Collapsing gold has scope to tumble further

G Chandrashekhar | Updated on March 01, 2020


Gold’s short-lived dream run is coming to an end sooner than many incurable bulls had expected; and when trading opens on Monday, there is the strong possibility of further correction in the global market and in India.

The factor that propelled the market higher — the widespread scare of novel coronavirus (Covid-19) morphing into a pandemic triggering growth concerns and possibly recession — brought the market down even more rapidly. Clearly, the rise from around $1,560 an ounce to about $1,690 in about five trading days was too much and too soon.

The market had overshot to the upside based not on any real substance but by gathering speculative lather. So, correction was inevitable as pointed out in these columns. (See Business Line Commentary February 23 ‘Time to sell gold and book profit’).

Haven appeal dims

Friday last, the world market witnessed a bloodbath in the financial market in general and bullion market in particular with prices of the precious metal collapsing by $100/oz to around $1,580. Silver, too, fell close to $17.5/oz. The fall in equity market exacerbated the collapse of gold prices as many investors exited gold to pay for margin calls.

In other words, gold’s haven appeal – a safe bet in uncertain times – has all but faded for the time being. Additionally, even rising expectation of a rate cut by the US Fed to stem the rout has not helped the yellow metal. This is reminiscent of the 2008 global financial crisis when gold behaved exactly the same way, falling in tandem with the equity market.

Subdued demand

In the days ahead, there is the strong possibility of gold extending the downward correction and moving first towards $1,550/oz and then closer to $1,500. While the inflow and outflow of speculative capital continues to move this fickle market, physical demand conditions are far from supportive. If anything, demand in both China and India — two of the world’s largest importers and consumers — is subdued.

With no insulation from the volatility in the global market, the domestic market saw gold price plunge by as much as ₹1,000 to trade around ₹41,400 per 10 grams. The rout is likely to continue in the days ahead in tandem with the global market.

Demand in the local market has turned decidedly weak. At well over ₹40,000 per 10 grams, there is enough evidence of buyers’ resistance. The inflow of scrap gold has also been rising, adding to supplies in the face of weak demand. Recent weakening of the rupee has partially neutralised the benefit of fall in dollar rates.

It is as yet unclear how Covid-19 will pan out in the weeks ahead. It can worsen and become a pandemic or businesses may find a way to work around the problem. In these uncertain times, markets can move either way quite rapidly. So, extreme caution is necessary. Ability to read advance market signals is the key to successful investing.

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

Published on March 01, 2020

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