Gold hovers near $1,600 even as investors flock to buy the metal

Ravindra Rao

Countries across the world are battling severe pressure on their health systems as well as the economy and are preparing for a widespread impact as the coronavirus outbreak continues unabated. Talks of a global recession are becoming stronger and investors are scurrying for assets that will help protect their investments.

Gold is considered a safe haven asset during times of financial and political uncertainty. Increasing uncertainty about the health of the global economy should boost safe-haven buying but the metal has been on a roller-coaster ride. The metal price has tested 2002 highs but has so far failed to sustain above the $1,700 per troy ounce.

While the surge in physical gold sales and ETF inflows show robust buying interest and has kept price supported, general strength in the US dollar has kept a check on the upside.

US Mint data show that sales of American Eagle gold coins rose from about 7,000 ounces in February to 142,000 ounces in March, a month on month increase of 1,928 percent and the highest since November 2016. Sale of silver coins jumped to 5.4825 million ounces in March from around 650,000 ounces in February.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Similar trend was witnessed in Australia as well.

Australia’s Perth Mint gold sales soared to their highest in about seven year, as investors bought the metal to safeguard themselves from the virus outbreak.

Sales of gold coins and minted bars in March surged to 93,775 ounces, the highest since April 2013, gaining more than 309 percent month on month and more than 186 percent from the same period last year.

Sales of silver coins in March jumped about 187 percent from February and rose 85.5 percent from the same period last year, to 17,36,409 ounces, its highest since March 2016.

Highlighting the rush to buy gold in physical markets, the Wall Street Journal reported that demand for gold had skyrocketed but there was not enough of it in local coffers to satisfy buyers’ appetites.

ETF investors are also putting more funds into the metal to safeguard themselves in times of uncertainty. Gold holdings with SPDR ETF were last reported at 968.75 tonnes, the highest since October 2016.

Despite the surge in demand and the possibility of supply tightness as virus-related restrictions hit mining and refining operations, the gold price remains choppy near $1,600.

One of the reasons is preference for cash, especially in form of the US dollar. The preference for US dollar indicates that market players expect the US economy to weather the virus outbreak better than other economies.

However, with continuing monetary infusion by the Fed and the severe economic impact on the economy, it is difficult that US dollar may be able to maintain its upper hand. If the US economic data continues to reflect pressure because of the outbreak, the dollar may weaken, increasing the appeal of gold.

The author is VP - Head Commodity Research at Kotak Securities.

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