Gold & Silver

Gold gets unintended liquidity boost even as global growth confidence tanks

G Chandrashekhar | Updated on March 25, 2020

Sharply falling stock markets inflicting heavy losses, collapsing crude oil prices, stronger US dollar and subdued demand have all combined to keep gold prices under check. The sentiment in the financial market 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 — grand illusion of the metal touching $2,000 a troy ounce — have been fleeing the market in droves.

The 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 June last year. The net long positions are likely to have been reduced even further in the last few days. Continuing outflow from gold ETFs has been 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 haven, perhaps the safest.

Mega boost

But gold has now received an unintended mega boost. Although on Monday gold was trading below the psychological $1,500/oz, its fortunes were boosted by the US government which announced an unprecedented rescue package worth $1 trillion. The Fed will start making unlimited bond purchases for an indefinite period of time. The ‘easy money’ policy has now become ultra-loose.

This major development catapulted gold higher. Overnight, the metal spiked by as much as $100/oz and was trading at a little over $1,600 during the day on Tuesday.

Indian market reflects global developments. Gold prices that had crashed close to ₹40,000 per 10 gm have gained overnight and now trade at around ₹41,700. Continually weakening rupee — 75.8 to a dollar — is an added support as it makes imports more expensive. Even at the slightly lower levels, there was hardly any physical demand. Demand destruction is palpable; and now with a sharp price rise, demand is set to suffer more. If the pandemic comes under control by April/May, 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 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 asset like gold.

Troubled gold had dragged silver down, but the metal has smartly recovered in tandem with its yellow counterpart. From around $12.6/oz on Monday, silver gained traction to trade at around $14 and in the local market at around ₹39,000/kg.

As always, caution should be the watch-word. Traders should not get carried away by the overnight price spike.

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


Published on March 25, 2020

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