Coronavirus outbreak: Why gold failed to take off?


The Covid-2019 pandemic has cast its spell of death and gloom across the planet. The death toll has increased exponentially over the last couple of weeks with the number of cases hovering around 2,84,000 and the death toll around 11,800 mark early on March 21st. Ironically, almost overnight only 29% of the cases are from China while the death toll too is skewed towards Europe with Italy alone accounting for over 4000 deaths as compared to China’s 3,255.

As a result, the stock markets crashed all over the globe (the Dow from a peak of over 29,000 points to near the 19,000 levels, while the BSE Sensex shed more than 14,000 points from its peak of around 42,000 not so long ago to around 28,000, before recovering to 29,915.96 on Friday), Brent crude went below $30 per barrel and likely to head towards $20 than $40.

The Fed cut its interest rate by 1.50% in two emergency moves and the markets are to be flooded with several billion dollars of liquidity even as bond yields went crazy. Other Central banks followed suit and with fear in the air the time was more than ripe for the precious metals, gold in particular. It was expected that the entire precious metals basket would benefit and that gold would test its all-time levels soon.

Gold made its move as it waltzed through to $1,700 per ounce levels briefly when the Fed cut interest rate by 1% just over a fortnight ago. But thereafter, the yellow metal did not follow its script.

After attempting to scale its own Mount Everest peak of $1,926 per ounce, it plummeted towards the depth of its pacific ocean as it tested the $1,450 per ounce resistance levels.

In short, it vacillated between $1,700 per ounce and $1,450 per ounce in the last two weeks in a giant roller coaster, swinging one way and then the other way. It ended the week at $1,494 per ounce on Friday (London pm fix); though just shy of the $1,500 per ounce mark in New York closing.

So, why was gold unable to enhance its status of a safe haven in times of distress and need for most asset classes? Why did gold prices not shoot up to the skies and scale fresh highs daily? Even a further 0.5% rate cut and the threat of the virus in Europe and across the western world did not appear to benefit gold. What was the key to change in script for gold?

One of the main reasons why gold failed to take off was the fact that the pandemonium caused by Covid 2019 sharply brought into focus that ’Cash is King’. With their lives literally at stake people went on a liquidation spree as they stacked up food and grocery items, etc. that led to shortages all over. Then, gold was sold to pay for losses in other asset classes. Moreover, margin calls (for those who were long on gold) on the commodity exchanges also led to a sell-off in gold.

However, in spite of all that gold ETFs have shown positive net inflows in the year to date. Short sellers too tried to cushion their losses as the gold first soared and then declined. However, buying at dips is not so easy due to the extreme volatility in prices.

The gold: silver ratio went well over 120 while platinum is less than half of gold’s price. Even palladium was at par with gold at times during the last few days. As and when things return to normal after the threat of Covid 2019 blows over, and the threat will cease! Then, gold would be poised to make its assault on its own Mount Everest. No looking back and no obstacles to stand in the way.

Meanwhile, a recent report published by the WGC throws up some interesting facts about the yellow metal. In spite of the recent sell-off in gold, it remains the best performing asset class year to date. It remains a high quality and highly liquid asset, trading over $260 billion per day in March. So far, selling is seen more on derivatives in exchanges and over-the –counter (OTC). Funds across regions have seen a net inflow of $3.6 billion inflows for taking the total to $11.5 billion year-to-date.

A study of some the asset classes in 2020 shows that while gold has till now fetched a 10% return in the current year, most other asset classes are in negative territory, oil being down over 70%. Nasdaq is down by over 20%, while S&P 500 is down by almost 30%. The only asset classes in positive territory apart from gold are US Treasuries by around 3-4% and US Cash barely up in positive territory. Gold has to just wait for its chance. Patience is the key to gold’s success.

The author is an independent analyst of precious metals and diamonds, who has worked with GFMS and WGC.


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