Coronavirus (COVID-19) has been weighing on the market’s trade sentiment off-late, pushing investors away from trading/investing. Investors are fleeing from equities markets, contributing to the influx of safe-haven assets such as long-term bonds, cash and gold. Gold was initially up 1.7% when the stock markets dropped, surging past $1,700 per ounce after a long distribution phase around 1,600 levels. However, gold price dipped more than 12% last week and prices are less likely to revisit $1,600. The panic selling in the market has impacted the gold prices, which begs the question: Is gold still a safe buy during this crisis?
Reason for the Underperformance
“It’s a little bit surprising with gold not having done better and it seems to be a sale across all asserts” – Mitsubishi analyst Jonathan Butler. The decline may be due to investors unloading bullion in exchange for cash and to meet margin calls being made in their investments in other asset classes. Meaning, we are seeing liquidation in gold to replenish cash positions.
Secondly, it is possible and reasonable to assume for governments to consider selling gold from their reserves to pay back its debt or fund stimulus plans. Recently, Venezuela sold 6 tonnes of central bank gold to raise more hard currency. The Lebanon debt crisis also prompted experts to suggest selling gold reserves to rebuild cash reserve of central bank for debt repayment.
Lastly, the rally of gold prices prior to the equity market sell-off has caused it to be relatively expensive when compared to other low-risk assets. This could be a signal for investors to exit their gold position at these levels. Gold will likely remain volatile as investors are waiting to see if the Trump administration is able to quickly pass their massive stimulus plan, as well as the effects of it in the near term.
Short-Term Gold Investment
Risk-seeking traders who view the current decline in gold as opportunities might be able to take advantage of this. Historically, the growth of gold began from 2003 to 2011 after the period of SARS. Now we are seeing huge accumulation at the bottom, with an average price of $1,575 for the 2nd week of March. Indicators like Variable Changing Price Momentum (VC PMI) identify area at $1,600 where more buyers start to enter the market. Another reversal sign would be seeing another higher low above $1,465. Before reaching the $1,600 mark, we see a strong support around $1,506.
Long-term Gold Investment
Alternatively, a long-term investment on gold could also be beneficial. In the long run, once the virus is under control, we would potentially see an extensive paradigm shift favouring gold as investor’s look to diversify their portfolios with more defensive assets. As the world is moving towards accommodating to demand such as food shortage and climate change, countries around the world could potentially load-up on their gold reserves to prepare for future crises.
Cash is King?
With equities, junk bonds and short-term bond losing popularity due to its undesirable risk levels, while long term bonds are expensive due to market saturation, investors are also looking into other alternatives such as cash (USD).
In this low economic growth environment, a weakening USD is undesirable due to its impact on multiple aspects, such as inflation rate, purchasing power and export/import, potentially causing stagflation. In addition, unemployment rate has been restated to 20% in the worst-case scenario, further putting pressure on the strength of USD. The Federal Reserve (Feds) has therefore been implementing measures to prevent this, mainly stabilizing the bond market by easing loan policies and purchasing bonds across all maturities in both investment-grade and speculative bond markets.
Blog article written by Cheryl Seah, Research Analyst, Maqro Capital
Cheryl holds a Bachelors of Commerce, majoring in Finance and Data Science at the University of Sydney. She assists the research team with monitoring macroeconomic events as well as providing, testing and modelling investment research ideas.