Time to keep a watch on gold supply disruption
Posted on Apr 13, 2020 at 12:00 am
Gold has been shining all the way, ever since Covid-19 became a pandemic. There was great volatility witnessed world over, wherein prices climbed to their highest level since 2012.
Though we did see gold prices moving a bit lower during the past few weeks, but the virus scare kept the rally in gold alive.
On one side gold is being considered as a safe haven asset and on the other side, its being over sold in order to cover up the losses incurred in the stock market. It’s being pulled from both the sides.
The Covid-19 outbreak has had a major impact on the gold market, bringing massive price swings as investors react to new developments related to the pandemic.
The World Health Organization officially declared Covid-19 a pandemic on March 11, but gold prices didn’t immediately rally as many expected, even as the hit to the global economy became apparent with the closure of schools and businesses around the world.
That’s because gold generally goes through a shakeout of weak hands before reaching new highs.
Currently the U.S dollar is considered the strongest fiat currency, while gold has broken out into new all time highs against the other currencies.
Gold had reached an all time intraday high of $1923.70 on September 6, 2011. Last week, on Thursday, gold was just $171 an ounce away from this high as it settled at $1752.80.
Gold did drop a bit on Friday, but it still remained very well supported.
We saw a lot of pumping in during the week by major world economies-
- In a bid to keep the economy afloat amid the outbreak, which had forced 16.8 million Americans to file for unemployment benefits since the week ended March 21; the Fed on Thursday announced a broad, $2.3 trillion stimulus package.
- European Union finance ministers also agreed on half-a-trillion Euros worth of economic support but left open the question of how to finance recovery in the bloc headed for a steep recession.
Any form of stimulus attracts gold. It improves the opportunity cost for holding the yellow metal.
Meanwhile, major physical bullion hubs saw activity dwindle last week due to coronavirus-led restrictions, with strained supply chains cut off from soaring safe-haven demand in some regions.
Supply disruptions have been a growing worry as governments around the world shutdown businesses deemed as nonessential.
Three of the world’s largest gold refineries—Valcambi, Argor-Heraeus and PAMP—have suspended production in Switzerland for at least a week on the back of mandatory closure of nonessential industry in the country to prevent the spread of coronavirus.
The problem is there are logistical issues moving metals around, so you cannot satisfy supplies of gold from one area and bring to another
The hunt for existing gold supplies in the near-term threatens to create significant issues with various markets that cannot connect with one another easily. There’s the possibility here of longer supply chain disruptions, which will make the odds grow that more interest in existing Comex inventories will be demanded
Currently we don’t see economies reviving up that fast, at least not for the current calendar year. A hold above $1,700 would be very constructive in terms of giving [gold] a boost up to the all-time highs. Hence there could possibly be acceleration in buying pressure on gold.
All said and done, it is a great time to buy gold equities which were sold off with general equities in the rush to meet margin calls
Meanwhile, in the domestic markets, especially the prices shall keep reflecting higher growth in gold compared to Global Comex as the depreciating rupee factor shall play a role.
The rupee which was trading at Rs72/$ odd average rate in March has spiked to an average rate to Rs 74-76/$ levels which indicates that the price of USDINR pair shall keep giving support to the yellow metal despite of a global fall.
I believe that one should allocate at least 25 percent of your portfolio in Gold ETFs, and another 30 percent in cash till a cure for COVID-19 is found, or lockdown is removed.