Mounting concerns over Covid-19 (novel cornonavirus), its spread beyond China, and the concomitant negative impact on global economic activity have combined to propel gold to the stratosphere. The epidemic has already caused enormous – but as yet unquantified – damage to global trade with little clarity on how it will pan out in the weeks ahead.
On Friday, the yellow metal recorded a seven-year high of $1,640 a troy ounce intraday. In the current uncertain conditions, gold seems to have truly regained its safe haven status with investment demand rebounding. The entire precious metals complex recorded gains last week with silver rallying to $18.5/oz.
Interestingly, gold’s stellar run was notwithstanding strong dollar and firmer stock markets. In other words, the flight to safety is benefiting both dollar and gold. On the other hand, China announced a stimulus package. The Chinese authorities have loosened the monetary policy to stem the ongoing slide in economic activity. It is likely this was a cue for the gold market to surge ahead.
Gold is benefiting from investment demand as evidenced by continuous inflow in gold ETFs for 20 days in a row now. As conditions have turned ideal for speculative financial investors, large scale ‘long positions’ have been created on the bourses.
The irrational exuberance shown by the gold market is not sustainable, in the opinion of this writer. Surely, gold bulls have been waiting for an opportunity for the metal to rally, and Covid-19 has provided that. While it is reported that the virus is spreading to other countries such as South Korea, reports from China suggest a gradual but definite slowdown in new cases.
As soon as evidence that this epidemic has been largely contained is available, gold prices are sure to face a precipitous fall – as much as 10 per cent to around $1,500/oz. Less committed speculators are sure to exit the market in hordes in the event.
While sentiment – fear – has driven the yellow metal so far, sentiment alone cannot retain it there for long. Ground reality will hit sooner rather than later. Consumption demand in two of the world’s largest markets – China and India – is subdued because of record local prices. Available import data suggest slowdown in inflows.
In China because of Covid-19, many jewelers are closed. In India, there is palpable destruction of physical demand with prices breaching ₹41,500 per 10 grams.
Given the fickle nature of gold’s current rally, investors have to exercise extreme caution. It is important not to get carried away by the current euphoria as it is likely to be short-lived. Opening of the market next week and the mood that permeates is critical. To err on the side of caution, it would make sense for investors to book profit and exit the market.
The current prices are attractive for scrap sale and large quantities are reported to be coming to the market. In other words, it is not the time to buy gold, but sell gold to take advantage of this rare opportunity.
( The writer is a policy commentator and commodities market specialist. Views are personal )