After struggling to find direction until last week, gold, punters’ eternal favourite, has today breached $1,800 a troy ounce to touch a multi-year high of $1,818/oz. It is the highest level since September 2011.

The metal is buoyed by the ongoing risk aversion binge with heavy demand from safe haven hunters in the context of rising Covid-19 infections not only in the US, where it reached the 3 million mark earlier this week, but also in countries as far apart as Brazil and India.

The lockdown of Australia’s Melbourne city after a surge in Covid-19 cases has added another layer of uncertainty about the ability of governments and health systems to contain the pandemic from recurring. Developments relating to Hong Kong are also on the radar.

A surge in the interest in the yellow metal is also evidenced by rising inflow in ETFs. Over 30 tonnes have flowed into ETFs in the first week of this month. According to the World Gold Council, such inflows amounted to 104 tonnes in June and, in the first half of this year, they aggregated 734 tonnes.

Very clearly, gold is now an investors’ delight, affirming its safe haven status during this time of global health and economic uncertainty.

Gold vs equities

The fact of the matter is that gold is on a fierce tug-of-war with the equities market. Hopes of a V-shaped recovery are rising, as recent data suggest. If the flow of economic data continues to stay positive for a period of time, the stock markets are bound to move higher, gradually moving towards a ‘risk-on’ environment.

On the other hand, notwithstanding improvements in economic data, if the pandemic situation worsens, it will heighten the uncertainty, and drive investments towards safe assets like gold.

Importantly, the yellow metal is currently benefiting from ultra-loose monetary policies pursued by various central bankers and expectation that such a stance will continue for a longer period. Wider fiscal deficit and rising debt levels are there for all to see.

No wonder, speculative financial investors are betting on a further rise in gold prices and have expanded their net long positions in the bourses over recent weeks. It should come as little surprise if gold prices made further gains towards $1,850/oz in the days ahead.

Physical market is down

However, it must be remembered that financial investment generates speculative froth which can dissipate at the slightest sniff of danger. The physical market for the yellow metal is far from supportive. Import and consumption in two of the world’s largest markets — China and India — are enervated.

Continued lockdown in India, limited pace of economic activity and rural population engaged in farm-related activities mean poor physical demand. Sharply rising domestic prices triggered by record international rates keep buyers at bay. Demand destruction at higher prices is very real.

On the other hand, scrap sales are rising, adding to supplies. So, recovery in gold demand in our country will not be anytime soon. India’s June imports were as low as 11 tonnes (over 80 percent lower year-on-year), showing only a marginal improvement over even negligible arrivals in April and May.

Given that physical demand in Asia is unlikely to recover soon, gold runs the risk of a big correction if economic data begin to provide evidence of revival in manufacturing and service sectors as well as in trade and investment. It may take the whole Q3 for the revival to gather pace.

In the event, equities will get a boost and gold will lose its sheen. A correction towards $1,600/oz levels in Q4 remains a distinct possibility on current reckoning.

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

Published on July 9, 2020