Sharply falling stock markets inflicting heavy losses, collapsing crude oil prices, a stronger US dollar and subdued physical demand have all combined to keep gold prices under check. The sentiment in the financial markets across the world is decidedly negative, with the coronavirus (Covid-19) taking a heavy toll not only on human lives but also on economic activity.

Cities are locked down, travel is curtailed, public life is at a near-standstill and the threat of a recession in the event the pandemic is not brought under control by April/May is very real. Speculative investors who nursed high but untenable hopes of a big rally in the yellow metal — a grand illusion of the metal touching $2,000 a troy ounce — are fleeing the market in droves.

US market regulator CFTC’s latest figures point to forced selling, especially by non-commercials who have speculative market positioning. According to reports, speculative net long positions were slashed by 27 per cent as of March 17, taking the positioning to the lowest levels since last June. The net long positions are likely to have been reduced even further in the last few days.

Outflow from ETFs

Continuing outflow from gold ETFs is adding to the metal’s woes. Last Friday, as much as 21 tonnes moved out of ETFs, most pronounced daily outflow since November 2016, pointed out a report. Additionally, the US dollar is holding admirably despite near-zero interest rate and expanding liquidity. No wonder many see not gold but the strong dollar as a safe haven, perhaps the safest.

On Monday, gold was trading at around $1,490/oz, below the psychological $1,500/oz. The ultra-loose monetary policy has been of no help. The price risk is to the downside given the negative sentiment across markets.

The Indian market reflects global developments. Gold prices have crashed close to ₹40,000 per 10 g. A continually weakening rupee — above 75 to a dollar — is somewhat supportive as it makes imports more expensive. Even at the current price level there is hardly any physical demand. Demand destruction is palpable.

What will help gold

If the pandemic comes under control by April/May, the turbulence in the financial market will abate. In the event, global equity and commodity markets are likely to see a big rebound. It will help gold, too, especially given the highly accommodative monetary policy of various central bankers in a coordinated manner and infusion of liquidity. As they say, ‘a rising tide lifts all boats’. Gold, too, will benefit from the liquidity driven commodity boom as we witnessed post 2008 meltdown.

However, any recovery in physical demand appears unlikely this year. Both China and India — two of world’s largest importers and consumers of gold — are facing economic headwinds. Consumption growth will continue to remain muted. It may become necessary for policymakers to ensure that enhanced liquidity is applied for productive economic activity, and not on unproductive assets like gold.

Troubled gold has dragged silver, too, down. Silver was trading at $12.6/oz on Monday and in the local market at less ₹37,000 per kg.

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

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