Overall, the sell-off in last few days shows that market players have lost their confidence in gold's capability to protect their wealth from slowdown triggered by virus outbreak.
Just days after testing the highest level since 2012, near $1,700 per troy ounce, gold witnessed a slump of nearly 15 percent to hit a low of near $1,450 per troy ounce. It was only to be followed by a rebound till $1,550 which also did not sustain and the price is now hovering near $1,480.
While gold prices are highly volatile, they are faring much better than other commodities like crude oil and copper or even silver. We are set to see much volatile times ahead as market players try to protect their capital.
Gold is considered a safe-haven asset which rises in times of economic and political uncertainty. Gold rose sharply as virus outbreak in China dented outlook for the economy. The gains intensified as virus outbreak spread out of China threatening to affect the global economy.
However, as the virus continued to infect more and more countries threatening to have a significant slowdown in global economy, market players grew nervous and moved out of all asset classes in favour of cash. This is evident from concurrent fall in commodities, equities and bonds and sharp rise in the US dollar.
While the virus outbreak remains out of control in the US as well, market players are still expecting the US economy to outperform hence the US dollar is seen as the saviour.
If we look historically, there have been instances when gold has not performed when everybody expected it to rise. During the 2008 economic crisis, gold topped $1,000 per troy ounce in March 2008 after Bear Stearns defaulted.
In the following months, we had a full-blown banking crisis and global recession but the panic in financial markets caused gold to fall to $700. By October 2008, however, this was followed by a sharp rally in gold supported by monetary easing by major central banks and this helped gold surge to $1,900 per troy ounce in 2011.
In March 2018, the US and China started a trade war by imposing tariffs against each other. The trade war intensified threatening to affect global economy. Gold was however trumped by US dollar as the preferred asset. Gold which traded near $1,320 per troy ounce in March 2018 fell to nearly $1,160 per troy ounce by August 2018.
However, the sell-off was followed by a sharp rebound till near $1,550 by August 2018 which extended further till $1,700 earlier this month.
Overall, the sell-off in the last few days shows that market players have lost their confidence in gold's capability to protect their wealth from slowdown triggered by the virus outbreak. However, with the increasing spread of virus, governments across the globe are infusing more and more liquidity and this could become the platform for gold's next up move.
The author is VP- Head Commodity Research at Kotak 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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