NEW DELHI: The coronavirus impact on markets across the globe has also affected gold, which is usually considered a safe haven, with extreme price volatility confusing investors. Gold’s sudden price fall this week, after hitting an all time high on March 9, is however not being seen by analysts as a vote against the metal, but rather a sell-off by investors seeking liquidity as they scrambled to square positions after a month of bloodbath across stock and commodity exchanges.
Gold, which traded at $1,674.5 an ounce on March 9, dropped to $1,477.3 on March 18, as stock markets continued their free fall. “The initial response of investors this month was to rush to buy gold as stocks and commodities across the board bled. However, as liquidity concerns arose, many had to sell the metal to raise money to square up,” pointed out Amit Banerjee, an independent merchant banker specialising in East Asian funds.
Analysts feel that the precious metal will remain the safe haven it is, and investments made now will fetch good returns over time. BlackRock’s Global Allocation Fund said that “with both nominal and real, i.e., inflation adjusted interest rates in free fall, gold is well positioned to do what it is intended to do: help insulate a portfolio. To the extent the coronavirus represents a threat to growth, gold should be a particularly effective hedge.”
According to the comparative analysis of asset classes in calendar year 2020 in a World Gold Council (WGC) report, while Nasdaq fell 22.1 per cent, commodities as a group lost 26.2 per cent and emerging markets lost 29.3 per cent as of March 18, gold lost just 1.1 per cent in value terms. “Thus far, selling appears more concentrated on derivatives in exchanges, and over the counter. While gold-backed ETFs have experienced outflows in recent days, flows remain positive for the year. Funds across regions have seen $3.6 billion of net inflows in March, giving a collective total of $11.5 billion year-to-date,” the WGC report said.
The WGC believes that in the weeks and months ahead, the deceleration in economic growth will undoubtedly impact gold consumer demand and gold’s volatility may remain high, but “high risk levels combined with widespread negative real rates and quantitative easing will be supportive of gold investment demand as a safe haven.” Analysts point out that gold showed similar volatile dips during the 2008-09 financial crisis, when it fell by 15-25 per cent a couple of times in 2008.
However, by the end of 2008, gold was one of the few assets that were posting positive returns. “In the ultimate analysis, bullion will remain a positive asset class.
And in troubled times like this, when we do not know for how long the coronavirus crisis is going to last and how deep the recession induced by it would be, gold as an investment whether physically or in the ETF format, will remain popular,” said Banerjee.
The Association of Mutual Funds in India says that some Rs 1,483 crore was pumped into gold-backed Equity-Traded Funds (ETF) in February this year, compared to a high of Rs 202 crore in January.