We advise that one needs to be very cautious while buying, considering the unknown nature of medium to long term progress of virus infections and the way different countries are going to deal with it
Sunil Kumar Katke
Gold has been the investors's choice considering the returns it has produced during the past 18 months, leading the chart with outstanding returns. This year, we saw the prices touch multi-year high above $1,700 per troy ounce mark. This was mainly supported by fundamentals like lower long term interest rates/yields, the United States-China trade conflicts, the US-Iran tensions and other factors that pushed demand for the yellow metal from investors. Individual investors, Exchange Traded Funds (ETFs) and most importantly global central banks drove the prices from about $1,200 an ounce 18 months back to close to the $1,700 mark. This took gold prices to all time high in Indian markets to above Rs 45,000 mark for 10 grams.
However, the rally got curbed by the threat posed by the novel coronavirus (COVID-19), which has spread worldwide bringing global trade to a halt. At first it was China, then Europe and then gradually it started impacting investor sentiment across the globe, resulting in sell-off in equity markets. Saudi Arabia entering into a price war with Russia on failing to convince the OPEC+ nations support on increasing the production cut also that led to the Crude price crash by more than 50 percent in a matter of days. Both these events built massive margin calls in other asset classes like gold leading to a sell-off bringing down the prices from recent $1,700 to $1,450 in no time at Comex and in Indian markets the prices tumbled from Rs 45,000 mark to close to Rs 38,200 mark within weeks.
On the other hand, lower crude oil prices can be a nightmare for exporting nations and is a blessing for importers like India, barring the negative impact on the local refineries that may post losses till the Saudi Arabia unrest is addressed, which will keep the yellow metal prices in check.
The efforts put in by governments across the globe on bailing out tumbling economies by the way of stimulus packages, and lowering interest rates by most of the central banks to tackle the medium term impact of corona virus, may bring back investor’s confidence on equity markets and the yellow metal at once, considering the pandemic is dealt with caution.
We expect gold prices to bounce back to the recent highs in the next two to three months, once things normalise and the panic among investors is at ease. However, the prices may test levels of $1,400 mark before seeing a recovery. We advise that one needs to be very cautious while buying, considering the unknown nature of medium to long term progress of virus infections and the way different countries are going to deal with it.
The author is Business Head – Commodity and Currency at Axis Securities.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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