Gold still remains an investors favourite

It was like a sabbatical for me as I write after a fortnight. There was too much volatility in the markets where prices were just swinging. Varied reasons being responsible, I actually wanted to take time out, analyse the global scenarios and then put across my inputs on gold’s behaviour.

Last week we saw unprecedented government action to get on top of the developing COVID-19 situation in Australia to avoid what we have seen in other countries. Not surprisingly, the combination of continuing falls in financial markets across all asset classes, societal restrictions and talk of further controls had investors running to safety.

Globally we witnessed acceleration in volumes and this has been the case across the whole physical bullion industry talking to our many contacts.

What has confused many is that they can see the massive demand for physical gold and silver while at the same time the price of the metals has fallen – at least in US dollars. The volatility in the spot price reflects a battle between the physical market and paper desk traders and trend following algorithms.

Last week there were a lot of articles that were similar to those back in the global financial crisis – stories about shortages and that the physical market and the paper market are, or have, disconnected.

The driver behind those stories has been the reality of physical products selling out and going on back order along with increases in premiums. This has been particularly the case in America, which has this week only really woken up to the threat of COVID-19 – resulting in increased demand for physical gold and silver.

The stand-out country at the moment is the USA which is paying a terrible price for the apparent downplaying of the virus in its early stages by President Trump, who as recently as February 28th referred to the virus incidence in the U.S. as a hoax, and saying the virus would miraculously go away.  No doubt many Trump believers thus treated any dire warnings of the pandemic as hugely overblown.  Now we are in a situation where the U.S. is the third most affected country in the world and if the virus spread continues at its current rate could even overtake China as the world’s most affected nation within a month.

The entire world is now aware or rather panic about the deadly virus. This panic is creating significant movement in the precious metals market.

Precious metals have seen price falls along with the equities markets, but in the case of gold not nearly to the same extent.  It keeps on being taken down below the $1,500 psychological level, but so far has invariably bounced back  Year to date the yellow metal is down around 1% while U.S. equities for example are down around 35% over the same period.  But this price fall is in U.S. dollars.  In most other countries, due to dollar strength, gold is close to all-time highs in domestic currencies and is thus serving extremely well as a wealth protector in these nations – indeed in most of the world.

Like most asset classes, gold is being affected by the unprecedented economic and financial market conditions in play around the globe. We believe that recent volatility in the gold price has been driven by massive liquidations across all assets, and likely magnified by leveraged positions and rule-based trading.

Gold has also likely been used to raise cash to cover losses in other asset classes because:

  • it remains one of the best performing asset classes year-to-date, despite recent fluctuations
  • it is a high quality and highly liquid asset, trading over US$260 billion (bn) per day in March

Looking ahead, we believe the deceleration in economic growth will undoubtedly impact gold consumer demand and gold’s volatility may remain high, but high risk levels combined with widespread negative real rates and quantitative easing will be supportive of gold investment demand as a safe haven.

But what we need to really know is that Why did the gold price drop alongside stocks?

The answer is linked to several factors. The most prominent of these is the massive liquidation virtually all asset classes experienced in the past week. And gold was no exception.

Even longer-term US treasuries prices fell, despite a second unscheduled cut by the Fed on 15 March slashing the Fed funds rate to pre-2016 levels. The 10-year US treasury yield is trading above 1% after reaching a historical low of 0.33% on 9 March.

As a high quality, liquid asset gold may also have been used to raise cash.

It may take a while for financial markets to stabilise. Amidst high volatility, the gold price may experience additional swings, but the long-term implications of an environment combining high risk and lower opportunity cost should support gold investment demand.

We also expect central banks to remain net gold buyers overall, albeit likely not at the same rate as in the past two years.

Bullion is set for back-to-back weekly losses for the first time since September after the dollar hit a record, although its drop was pared Friday as investors took stock of the outlook for the global economy, the spread of the disease, and looser monetary policy. With deep losses in risk assets this month, some investors have been forced to sell gold to raise cash. A similar pattern — losses at times of extreme market stress — was seen in bullion at the onset of the global financial crisis in late 2008, before it went on to peak in 2011.

These major crashes show that Gold and silver eventually respond to the crisis of the time and prices ultimately soar.

You’ll notice this occurred during periods of both inflation and deflation. While they both tend to do better in inflation, they ultimately rose in response to crisis.

This of course is what we have on our hands now. History says that despite the current selloff in gold and silver, the crisis will draw in more and more investors and as a result, eventually impact their prices in a major way.

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