In the 20th Century, the US entry into the two world wars tilted the balance decisively in favour of the allied forces and brought a swift end to the world wars. In stark contrast, in the global battle against Covid-19, late entrant US has made matters far worse. The US leads the number of infected cases at nearly 300,000, out of 11,00,000 globally, with a death toll of over 7,400 there against a global tally of nearly 60,000.
Of the total number of deaths due to Covid-19, over 53,000 of the dead are accounted for by 10 countries, of which around 47,000 plus deaths were related to European countries and the USA. The numbers from China, the origin of Covid-19, are almost static with a death toll around 3,400 followed by Iran near 3,300.
The rest of Asia, a potential hotspot due to its population density and third world status is comparatively less affected by the dreaded virus. So, what is in store for the rest of the world as far as the Covid-19 is concerned? Why is it important for the global economy and where does gold go from here? One of the first impacts of Covid-19 has been on the global financial markets with the spectacular meltdown of global stock market indices.
Currently, the Dow Jones is down by around 38%, it was down by over 50% when it crashed to near 19,000 levels in third week of March. In India, the BSE Sensex is now down from its peak of around 42,000 by around 50% around 27,500 and at its recent lows of around 25,900, the decline was over 60%. This brought most the countries closer to recession, as if some of the advanced economies are not already into deep recession.
As a result, the US Fed first sharply reduced interest rates to nearly 0% and then introduced a huge dose of quantitative easing just a fortnight ago by its unlimited bond buying to bring liquidity into the markets. Then, the US Congress passed a multi-trillion USD package to bring more liquidity to the markets. Other central banks and governments have followed suit.
As long as the Virus continues to spread and lockdown extended, global economies will continue in a tailspin. What does the balance sheet of gold show? What are its positives and what are its pitfalls? Here is a look at some of scenarios for gold:
Recession: In the aftermath of the Lehman Brothers induced recession in 2008 gold scaled its all-time high of $1,926 per ounce mark in September 2011. In the wake of Covid-19, a deeper recession is predicted and with gold over $1,600 per ounce levels, many forecast much higher price of gold in the near future. QEs & lower interest rates: Past history shows that gold has always benefitted from QEs.
This unlimited infusion of liquidity into US bond markets could open the gates for gold. Lower interest rates have always meant more impetus for gold and coupled with lower yields gold could zoom ahead at the opportune time. Uncertainty: The growing uncertainty over Covid-19 has made financial markets jittery and led investors to look at gold as a safe haven.
Lockdown: Lockdown in major markets in the world has meant that economic activity has come to a standstill and as long as it continues the gold price would remain volatile. Gold’s safe haven status would come to the fore only when normalcy returns to the markets and economic activity commences. US jobless claims data:
The latest record high data on jobless claims of 6.6 million from the US could only prove to be beneficial for gold. Russian decision to halt gold purchases: The decision to halt Central Bank purchases by Russia in the wake of its oil price war with Saudi Arabia could dampen spirits for gold. For, in recent years Russia lead a group of countries in gold purchases.
If the Russians are forced to sell gold due to economic strife, then it could not augur well for the yellow metal. Cash is king: With most commercial activity at a standstill there have been reports of sale of gold to pay off debts, margin money for futures trading and just essentials to survive.
One expects sale of scrap gold to hit jewellery markets once trading at the retail level resumes. Recovery: There is a big question mark as to when Covid-19 will ultimately blow over. Only once that happens can one gauge the extent of damage to global economy. Thereafter, gold could come into play as a safe haven when earnings gather momentum.
Elsewhere, after two abortive attempts in March to scale $1,700 per ounce, gold ended the week on April 3rd at $1,613.10 per ounce (London pm fix). Should it remain above $1,600 per ounce at the end of each day over the next few days, it could begin its pursuit all over again. However, any closing below $1,600 per ounce could push it back to $1,550 per ounce. In Mumbai, gold ended close to Rs.44,000 per 10 gms at Rs.43,936 per 10 gms (buoyed by the falling rupee, IBJA rates). Meanwhile, with gold mining, refining and retail activity almost at a standstill in gold markets, there is very little physical gold left for trading.
Most of the trading is in the futures markets. Paper gold without underlying physical gold is not worth investing. Once the markets open, there could be glut of gold to tide over lack of liquidity in the markets and book losses. Thereafter, there would be no limits for gold prices. The author is an independent analyst of precious metals and diamonds, who has worked with GFMS and WGC.