The coronavirus menace has resulted in significant turbulence within the entire global economy. Analysts and experts are already predicting negative growth rate for the economy. However, haven assets seem to be gradually taking their place in the market. Gold continued to rise on March 24 after a recent wave of selling dried up, and Goldman Sachs told its clients to buy.
Goldman Sachs experts believe that it is time to buy the ‘currency of last resort.’ Just like the other asset classes, gold has encountered tough times after investors went scrambling for the US dollars. The precious metal lost 12% from its early March peak of almost $1,700 a troy ounce to $1,460 last week.
Gold started to experience a resurgence on March 23, gaining by over 4% after the Federal Reserve announced that it would buy unlimited amounts of government bonds and the US dollar fell. It then gained an additional 4% to $1,618 on March 24, feeding on the recommendation from Goldman Sachs.
According to Goldman Sachs, gold was at an inflection point and may reach $1,800 within the next 12 months. The record high for gold is $1,900, which it reached in 2011. The head of commodities at the Wall Street bank, Jeffrey Currie, stated:
“We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policymakers act to accommodate shocks such as the one being experienced now.”
In addition to being perceived as a hedge against all types of market volatility, gold is seen by most investors as a way to protect themselves from the debasement of fiat currencies and also inflation. The chief executive of Sprott Asset Management, John Ciampaglia, said:
“It’s just like in 2008 and 2009 when governments and central banks turned the printing press on full speed.”
Traders stated that gold has also been empowered by a weaker US dollar and other measures that were taken by the Fed. Notably, the opening of swap lines with other central banks to enhance the availability of dollars in the financial system is helping gold.
A weaker dollar is always positive for gold since it minimizes the cost of buying the precious metal for the holders of other currencies. A precious metals analyst at HSBC in New York, James Steel, said:
“The opening up of the swap lines, which may or may not curb the dollar rally, has at least made the US currency more available.”
Although the interest rates were probably to be kept near zero, governments were likely to use fiscal policy to drive the inflation back towards targets according to a fund manager at Schroders, Jim Luke. He views rising consumer prices as a positive for gold. He added:
“Fiscal policy can take various forms, and we do not rule out direct ‘helicopter money’ type interventions at all. As such, we could not imagine a more bullish environment for gold prices.”
An analyst at Scotiabank, Nicky Shiels, stated that investors must be wary since physical demand might remain considerably low. He commented while referring to the large parts of India subject to a lockdown. He explained:
“Also, oil-sensitive emerging market central banks are likely to lower their pace of gold purchases.”
The strains that arise from the recent volatility in the gold market were also seen on March 24 with the cash price of gold trading at a $23 discount versus the future prices on the Comex exchange in New York.
Although there is no shortage of physical gold, traders and investors said that a lot of it was in the wrong form or the wrong location. There had been some impact on the liquidity coming from the price volatility in Comex 100-ounce futures contracts, according to the London Bullion Market Association. It stated:
“LBMA has offered its support to CME Group to facilitate physical delivery in New York and is working closely with Comex; and other key stakeholders to ensure the efficient running of the global gold market.”
For now, the markets are in a wait-and-see mode awaiting the next direction that the markets will take.