Pumping of liqudity pumos up gold prices
Posted on Apr 07, 2020 at 12:00 am
The coronavirus, which emerged in China late last year, has turned into a global pandemic that has claimed lives of over 70,000 people and paralysed large wraps of the global economy.
From a spark in prices, gold did witness a minor correction as it dipped in March. The decline in gold price in March can primarily be attributed to two reasons.
- Investors were selling everything including equities, bonds and precious metals owing to the panic caused by an unprecedented non-financial hazard — the coronavirus — to global financial markets.
- Partial or full lockdowns by various governments to enforce social distancing in order to curb the spread of the virus, raised concerns about gold mining.
But gold continues to receive support as all central banks are trying to inject more liquidity in to the system with their easy monetary policies.
FED- Fed has reduced the benchmark interest rate to zero. A top official at the U.S. Federal Reserve on Sunday said the $2.3 trillion economic relief bill approved by Congress was appropriately sized and that a further relief effort may not be needed if support efforts are well executed.
The ECB and the Bank of Japan- they are maintaining a negative interest rate policy for a long time. Japan’s PM Shinzo Abe is set to declare a state of emergency soon as the number of confirmed cases in Tokyo soars past the 1,000 mark. In addition, things remain tense in Britain with the death toll nearing 5,000 even as PM Boris Johnson gets hospitalized due to coronavirus. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies.
However , post the dip in gold prices in March, the precious yellow metal regained momentum after President Donald Trump told U.S. citizens to prepare for “very, very painful two weeks” on Mar 31. Moreover, weak economic data dented market participants' confidence.
Gold prices rallied to erase three-quarters of this week's earlier $60 drop Thursday in lunchtime, rising to $1612 per ounce as US stock markets rose despite weekly claims for jobless benefits setting their second new all-time record in a row amid the fast-worsening Coronavirus Crisis.
The initial jobless claims by the Americans skyrocketed to a historic high of nearly 10 million for two consecutive weeks ended Mar 21 and Mar 28. The United States has never lost more than 1.4 million jobs in any two successive weeks in its history. Moreover, U.S. auto sales declined to 11.4 million in March from 16.7 million in February.
After rising steadily for 113 consecutive months, job creation in the US witnessed a contraction during the month of March, with the US economy registering a loss of 701k jobs because of the shutdown of workplaces and factories across the country. This boosted the safe haven appeal of gold as markets worry about the economic fallout from the pandemic and the rising risks of an upcoming recession not just in the US economy but also in the global economy.
However, gains in gold remained limited as the US dollar continued to make gains as a preferred safe haven currency despite the weak economic data from the US. The dollar shares a negative correlation with gold as a higher dollar makes it more expensive for holders of non-dollar currencies to purchase gold.
From a long term standpoint, gold will still remain the preferred asset as the environment of low interest rates and virus induced global slowdown would support a prolonged rally
While equities tend to dominate the headlines, it has been the star performer of the past two decades. The graphic below shows how gold has outperformed both the Down Jones and the US Dollar since 2001. Gold is up 498% compared to the Dow up 98% and the dollar down 81%. Gold indeed remains a favourite
Gold continues to be in wait-and-see mode on how bad the global economy will get and how long will the depression-like conditions last.
Most traders would expect gold to be higher, after the payrolls data but “gold’s problem is that supply tightness is easing, and the dollar continues to grind higher. Ultimately gold will shine from the entire fiscal and monetary stimulus being pumped into markets globally.
The aggravation of coronavirus pandemic with each passing day has left investors scurrying for safe-haven assets as they remain apprehensive regarding the recovery of global economic growth and its consequent impact on stock markets. This, in turn, has triggered a demand for gold, which is considered as a key investment option during times of financial turbulence.