The path to recovery will be gradual

We have seen that gold has been moving sideways since early April. It is trading above Feb-March highs, but it looks like a consolidation within a medium-term uptrend for the yellow metal.

On one side it has managed to cross some important levels, on the other side it’s struggling to hold above the measured base objective at $1700/05/ Moreover, the upside momentum is weakening near-term and the threat of a consolidation phase is growing.

The main reason for this kind of behaviour in gold is the on-going USD funding crunch that is holding financial markets hostage at the moment. As a result, gold was sold off alongside the equities melt-down as global investors rushed to raise cash in order to make up for the losses.

But if we see the longer perspective, we can say that once this USD funding crunch dissipates after 2Q, gold should respond well to the massive amount of global monetary policy easing. By then, there is significant default risk as the global economy slows down drastically. Hence, gold’s safe haven role should return with a vengeance. Furthermore, recent global lockdowns have resulted in a shortage of physical gold as global transportation links get cut. As such, we would expect Gold to rebound significantly in the quarters ahead.

But currently, the broader picture speaks about world economies especially US. The global GDP is down almost 3.5-4%. Though the situation wont remain the same forever, but one thing is clear is that the path of recovery will be gradual and that it is going to be very hard for the next few quarters, at least across all the commodities, with maybe gold being the exception .

One more thing that catches attention is gold supply. Of late, mining capacity has suffered a setback due to COVID 19 and the lockdown situations globally. We all know that in times of uncertainties, demand for the yellow metal rises. The same is going to happen soon but physical availability of gold is limited.

We’ve seen central bank buying and with interest rates the way they are, and the investment demand and the bullion side and ETFs being extremely strong, it could very well be very hard to source physical gold to where it’s needed.

But with interest rates and carry costs the way they are, keeping gold in vaults will make a lot of sense, people will buy it as a hedge and insurance, and therefore there might be some scarcity that we haven’t really seen before, where the flows from vaults into the physical market would not occur as readily.

Hence we can say the slowly growing economies, increased demand and restricted supply, combined together will play a pivotal role in influencing gold prices.

What is clear is that COVID-19 has resulted in sudden falls in global economies and commodities markets, with supply disruptions on a global scale never witnessed before. The resulting shockwaves have produced a great deal of uncertainty in terms of the future global growth outlook, and this includes the outlook for commodities.

 

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3 Comments

Shruti Rai
May 28, 2020 At 11:37 am

The recent GDP decline of 3.5% is marked to be one of the first negative GDP after the 1.1% drop in the quarter of 2014.

Rishi Desai
May 28, 2020 At 11:38 am

Small investors like me have to pay the price as there is no revenue generated and on the other hand have no backup plans to sustain regular expenses. Stabilizing the economy is one of the biggest challenges that our nation is facing at present. Hence the statement makes clear sense that slowly growing economics, increasing demand, and restricted supply, altogether will play an important role in influencing gold prices.

Chirag Khushalani
May 28, 2020 At 11:39 am

Unfortunately, the pandemic came at the most inopportune time when India was showing signs of recovery after bold monetary measures. Hence, it is true that we will be facing single-digit growth for the coming Finacial Year 2021.

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