Gold in bear territory; what should you do?

Sovereign Gold Bond

Due to gold’s special appeal as a safe haven asset during periods of economic stress, gold’s demand continues to be on the higher side.

The outbreak of COVID-19 has had a profound effect on the economy and people across the world. Fear of impending economic turmoil triggered massive sell-off in the financial and commodity markets.

Gold, which had been on a steady rise, also succumbed to panic sell-off and fell 14 percent from its seven-year high touched in early March.

London spot gold breached the $1,700 per troy ounce in the first week of March to test its highest level in the last seven years but have been on a downward slope since. Domestic futures prices too surged to an all-time of Rs 44,881 per ten grams but sharply plummeted later.

Gold is considered a safe investment during periods of economic and political uncertainty. Concerns over the near-term global economic growth due to the outbreak of coronavirus, investors rushed into the safety of gold.

The precious white metal, silver, also plunged more than 35 percent on concerns over weak industrial demand. Metals which are heavily used for industrial application tumbled sharply on hopes of feeble demand prospects.

Economic slump due to the deadly pandemic in the top commodity consumer China was even larger than analysts feared. There are expectations that same grim economic numbers will start to come out from other badly hit areas like Europe and the US.

Looking ahead, gold will continue with its broad positive outlook. If weak global economic conditions and low-interest rates remain, may lift the demand for the yellow metal. Traders prefer to seek shelter in safe assets like gold when they lose confidence in risky assets like equity. Prevailing low bank rates are another reason for investors to park their money in gold like non-interest yielding assets.

The widespread deadly pandemic has brought us to the brink of a global recession. Central banks across the globe are taking measures for liquidity injection to stabilise investor confidence. Historically, economic easing measures could lift the appetite for gold.

The US Federal Reserve surprisingly cut its interest rates to zero and pumped $700 billion dollars into their economy after financial markets tanked. Fed’s decision triggered emergency policy easing from European Central Bank, Bank of Japan, New Zealand, South Korea and Australia as well.

On the domestic front, gold prices are likely to edge higher due to weak domestic currency. A weak rupee will lift the landed cost of the commodity in the country. Recently, Indian Rupee tumbled to a historic low of Rs 75 per dollar due to the persistent slowdown in domestic economy. As per the forecast, rupee’s weakness is likely to continue which will keep domestic prices higher.

The ongoing fears of the health crisis are expected to be much more damaging to the global economy. Due to gold’s special appeal as a safe haven during periods of economic stress, gold’s demand continues to be on the higher side. The unsolved trade war tensions between US-China and political unrest in many countries will also provide lower level support to the commodity.

On the price front, if the support of $1,435 remains undisturbed, upticks are expected to continue towards the next resistance of $1,710 followed by $1,780 levels. However, an unexpected drop below $1,365 would be a signal of a downside reversal. On the domestic market, if conditions are favourable, Rs 50,000 per ten grams can still be achievable. A drop below Rs 32,000 per ten grams is less likely under present market conditions.

First Published in Moneycontrol.


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