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Published on 22/09/2020 5:30:13 PM | Source: Motilal Oswal Financial Services Ltd

Gold – The safe haven metal over the last 18 months has been roaring like a lion By Motilal Oswal

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The Golden Dip

Gold – The safe haven metal over the last 18 months has been roaring like a lion in the jungle adding 25% gains in 2019 followed by over 40% gains in 2020(YTD). No resistance, no hurdle, no news seemed to matter for the metal. And, why not? After all it had all the right reasons to behave like it did in CY 2019-20. Safe haven attraction increases when there is distress or chaos in the market, a situation where market participants feel more comfortable investing in safer low volatile asset rather than riskier asset. If we just glance through the series of events that have happened just in this year i.e. 2020, then the previous statement seems more justified.

The concerns between US and China continue to oscillate, keeping the underlying tone for precious metal supportive. Along with that, rapid rise in the COVID-19 cases, fall in the global bond yields, central banks dovish stance w.r.t. interest rate and stimulus measures, continuous flow in ETFS, rising geo-political tensions and few other factors are adding to the pain.

 

What led to the recent correction?

Bullions for much of the year have had a great run, and have taken a breather recently, as market participants took some profits off the table. By the start of August, Gold had given more than 40% returns in 2020(YTD) and silver had given more 50% returns for the year, hence letting some steam off before the next leg of rally begins.

The recent volatility which was witnessed in gold prices has more to do with the speed of the move rather than the direction of it. The rally in gold prices was so steep that it overshot its fundamentals and investors took some money off the table which led to correction. Such volatility is normal when the market becomes too much one sided and even a small event will trigger a large sell-off. At the same time the speed at which the prices are inching higher from every such dip also reiterates the investor interest in the metal.

 

What happens when a vaccine is discovered?

It is hard to find any relation between Covid-19 vaccine and gold, the rally in bullions has more to do with economy and liquidity and not the pandemic.

Should the vaccine be invented will central banks immediately withdraw the liquidity and the governments would backtrack all their stimulus measures which were initiated to support the businesses and households, our answer would be ‘No’. Russia became the first country to announce vaccine for Covid-19, even though their antidote is still in the Phase-3 trial; it is showing significant results creating optimism in the market. This was followed by many other global pharma giants who are pushing hard to develop a vaccine for the pandemic

 

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