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Precious Materials insight; Gold poised for upside in 2020 as coronavirus spreads

01 Apr 2020

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Gold’s “safe-haven status” appears set to drive prices of the yellow metal higher as riskier assets slide impacted by a worsening coronavirus pandemic in 2020. David Brough reports.

April 1, 2020 - Gold prices appear poised to benefit from a flight away from riskier assets as the coronavirus pandemic tightens its grip on the world economy. The gold price could rise toward $1,800 an ounce in the not too distant future, according to strategists at TD Securities, reflecting the views of many dealers and jewellers. On April 1 bullion, which rose by 4.6 percent in the first quarter of 2020, was $1,593.42 an ounce, up 1.0 percent.

Jewellers who hold gold inventory are more protected against downside risks for their businesses during the crisis, as they can exchange the precious metal for cash. They can also raise margins by scrapping customers’ gold – if they can resolve logistical challenges during the lockdown. For UK jewellers, a weak pound will boost their returns on cashing in dollar-denominated gold.

 Video: Precious Materials Insight webinar replay presented by David Brough, Philip Newman, Jayant Raniga

Gold has outperformed riskier assets such as shares so far this year due to its safe haven allure. The coronavirus pandemic has stoked fears that the global economy is heading to recession, driving share markets down as many businesses struggle to survive. Wall Street had its worst month since 2008, with the S&P 500 falling 12.5 percent in March as coronavirus hammered the world economy. Coronavirus resulted in the FTSE 100 marking its worst quarter since 1987.

Equity markets risk further falls as the gravity of the crisis continues to sink in, with U.S. coronavirus cases now exceeding the total in China. President Donald Trump’s assertion that he hopes to get America back to work again by Easter may be optimistic in view of the current rate of increase of coronavirus cases in the world’s biggest economy.

The U.S. central bank has slashed interest rates to rock bottom and pumped liquidity into the economy, supporting gold which bears no interest. “Quantitative easing” policies introduced by central banks could eventually fuel inflation, which would be supportive to gold, which is widely seen as a hedge against rising prices.

Due to the lockdown in much of the world, physical gold bullion has become much harder to obtain. “Gold bullion, if you can get it, is almost certainly the best protection against wealth degradation,” wrote Lawrie Williams, gold market commentator with bullion dealer Sharps Pixley.

“Those who still have any money left will turn to traditional safe havens of which gold may be the No.1 choice – if they can get their hands on any. “Supplies are under pressure as refineries shut down and mines are forced to close.  We could see the ‘mother’ of all short squeezes on gold and the price could skyrocket.” 

Potential upside in gold prices will be capped by the need for cash, perhaps the safest haven of all. Earlier in March, gold appeared to briefly lose its safe haven status due to a startling flight to cash in the face of tumbling financial markets.

Nevertheless gold’s most recent dramatic fall in prices, after touching the highest level in more than seven years in excess of $1,700 an ounce, was less than other assets, including many shares, underscoring that its safe-haven appeal to investors was far from dead. Gold hit its highest since December 2012 at $1,702.98 an ounce on March 9, before selling off on profit booking as stock markets plummeted.

Last week gold prices rose by more than 8 percent, their best week since the height of the financial crisis in December 2008, and appeared well-positioned for further gains due to a weakening U.S. dollar. A leap in U.S. unemployment filings raised hopes for more stimulus measures to combat the global emergency, potentially supporting bullion further.

The weakening of the dollar following the poor U.S. unemployment data helped to underpin gold. The outlook for gold prices in 2020 will hinge to a large degree on the dollar exchange rate.

If the greenback is viewed as a safe haven currency, its strength will raise the cost of acquiring gold in alternative currencies, potentially weighing on the gold price outlook. However, for now, gold’s appeal as a safe haven seems to be back in force, although selloffs of bullion to meet margin calls are likely if assets such as equities tumble.

Disclaimer: Any opinions expressed in this article are solely those of the author and should not be seen as investment advice.

 

Source: The NAJ