*The rush into government bonds pushed Germany's Bunds yield fell below zero
*Investor sold their gold positions to cover their losses in equities and also to cover margin calls
There is an old saying in trading markets that when times get really dire and anxiety is high, you don’t sell what you want, you sell what you can. Such is likely part of the reason safe-haven gold has seen downside price pressure this week. The tandem selloff in stocks and gold, an unusual dynamic because gold tends to draw bids when risk assets are sold, is due to increase fears, said Pruthvi Raj Kothari chairman Ridhdhi Sidhdhi Bullion in Mumbai. With cases now confirmed in more than 50 countries, all but 70 of 2,800 deaths so far have hit China, the vast majority of them in source city Wuhan.
Global stock markets meantime extended their worst drop weekly drop since October 2008's meltdown, while crude oil prices fell to $45 per barrel of WTI, down by almost one-third from early January's 2-year high. According to Pruthvi Raj Kothari, the rush into government bonds pushed prices so high; the yield offered by all of Germany's Bunds fell below zero, locking in a loss of value for new buyers even out on 30-year debt, while 2-year US Treasury yields sank below 1% for the first time since 2016.
The gold price hit a seven-year high at the start of the week as a surge in coronavirus cases outside China triggered fears of a pandemic and roiled stock markets around the world. On 24 February the price of gold rose to $1,689 per ounce (31.1035 gram), easing to $1,587 as the week went on. So gold’s plunge Friday as much as 5%, the most in almost seven years. Its bloodshed, Commerzbank analyst Carsten Fritsch said. It first started with forced selling from equity investors who also sold their gold positions to cover their losses in equities and also to cover margin calls. Money managers are clearly buying gold to hedge against a downturn in the global economy.
Other precious metals including silver and platinum also dropped, with palladium declining as much as 13%, the most since 2008. A pause in Coronavirus headlines might see gold take a breather too, but the metal has already risen in 10 of the last 12 weeks. The World Gold Council is also reporting unprecedented demand for gold-backed exchange traded funds from global investors. Net inflows to the asset class reached $3.1billion in January, boosting holdings to an all-time high of 2,947 ton.
Despite its perception as a safe haven and despite exceptional growth from 2000 to 2011, the price of gold reached $1,855 in August 2011 yet fell to about $1,103 at the beginning of 2016. Will the gold price continue to rise? In the short term, Kothari said it would, but opinions were divided when it came to predictions further out. If the outlook for the global economy improves, or in this instance the spread of the coronavirus slows, investors are likely to revert quickly back to shares on the view that the damage caused will be limited.
We think that there will be opportunities to continue to add to long exposure, Suki Cooper, precious metals analyst at Standard Chartered Bank. You might see a little bit of a sell-off, so there might be better entry levels. But beyond that, we think that upside risks still linger for gold.
(Disclaimer: This analysis is only for educational purpose and is not and must not be construed as investment advice. It is analysis based purely on economic theory and empirical evidence. Readers are requested to kindly consider their own view first, before taking any position.) Date: 2-3-2020