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Yellow metal down 12 per cent in a week; is the gold temptation over?

Tue Mar 17 2020


Central bank’s liquidity push, accompanied by investors’ rush for cash melts yellow metal amid global sell-off


Gold prices have yet again stumped the investors — this time with a sharp slide within a week. The gold futures on MCX for April contract fell from ₹44,353 per 10 gm on March 9 to ₹38,940 on Tuesday erasing over ₹ 5,500 or over 12 per cent of its value.


This, according to expert, is a part of the global phenomenon, where investors encash their gold holdings to settle losses in other asset classes - mainly equities.


Also, further pushing the yellow metal is the rate cut decisions and fiscal measures by the leading Central banks of developed world including the US and Europe. On Sunday, the US Fed cut its interest rates to almost zero besides the US government declaring $700-billion stimulus package for the “virus-affected” economy. Such liquidity pumping measures amid economic slowdown following Covid-19 outbreak triggered a flight of investors. CME Gold April futures slipped from $1704 to $1450 an oz between March 9 and 16.


The global gold ‘meltdown’ was clearly reflected in India, where spot prices hit a two-month low. Spot gold was last quoted at ₹39,969 per 10 gm (of 999 purity without taxes) on January 17, 2020. Since then the yellow metal has been on an upward journey hitting a high of ₹44,415 briefly in February.


Experts caution investors and gold buyers to hold their gold temptation for a while. “We are seeing a complete restructuring of asset classes across the world. The governments saw that the money was getting blocked in safe havens rather than being utilised to trigger economic activities. It is clear from their monetary actions that the governments want people to invest in economy and not in safe havens,” Haresh Acharya, Director, India Bullion and Jewellers Association (IBJA), told BusinessLine.


“Investors should look for new avenues to invest rather than keeping money in gold,” added Acharya.

Fears of global recession


In a panic situation, where equities have eroded a larger part of the wealth and corporate profits, there are greater fears of global recession. Even if the RBI has not immediately cut the key rates, it has not ruled out the option to pump-in additional liquidity later.


After global equities markets crashed, the margin calls and losses triggered the hunt for cash. Gold - a liquid asset - is used as a source for cash.


Echoing similar sentiment, Dinesh Thakkar, CMD, Tradebulls, said, “The sell-off in yellow metal can be attributed to the mad dash to raise cash by selling gold. Hike in margin calls also led to unwinding of long positions in gold as traders were forced to reduce their positions and cover loss in other asset class like equity.”


While gold is seen in a similar trend as was seen in 2008. But the 2008 experience also points that once the worst got over for the global economy, gold started moving up in spite of equity markets moving down.


“Once common sense will return to the market, investors will prefer gold which will act as hedge against any negative economic activities. We might see gold’s sell off to continue till $1450 before recovering back to $1550. Medium term support and target on the downside comes around ₹37,500 in MCX and we believe that would be the bottom. Buying momentum will resume above ₹40,000 in MCX,” said Thakkar.


Source: Hindu business line.