It has been a strong start to 2020 for gold, with the yellow metal rising by 12.99% in AUD terms, and 4.54% in USD terms in the first two months of the year, despite the sharp correction in precious metal prices last Friday.
Onto these wild market swings and uncertainty, gold once again provided a safe haven against emerging turmoil. The biggest weekly gain since 2009 took it to levels not seen for seven years, leaving both silver and platinum trailing in the process.
The coronavirus outbreak has worsened to now more than 95,000 infected worldwide and has spread globally. The threat of the coronavirus on global economic growth has now impacted all asset classes, global trade, liquidity and central bank policies.
It was in mid-February when the severity of the economic impact of the coronavirus began to be reflected by major companies, such as Apple when it provided earnings warnings. For several weeks major parts of China were locked down (closing businesses) to contain the outbreak. The impact was a reminder of how important China is in the global supply chain and its impact on global growth. Yields fell, yield curves flattened and inverted inflation expectations rolled over and commodity prices collapsed.
The negative economic impact of the coronavirus that for weeks has been signaled through weakness, finally spread like a wildfire to the rest of the market. The week kicked off with an emergency 50bp rate cut by the U.S. Federal Reserve, a move that only strengthened the sense of panic in the market. Within a few days, global sovereign bond yields had collapsed to a record low, gold and stock market volatility spiked while the dollar came under some significant selling pressure as longs were exited.
On March 3, the U.S. Federal Reserve (the “Fed”) made a surprise emergency cut in interest rates taking the Fed Funds rates down 50 basis points to a range of 1.00%-1.25%. The rate cut made an immediate, positive impact on gold bullion and gold equities.
The emergency rate cut from the U.S. Federal Reserve on Monday, is, according to market expectations, likely to be followed by another 50 bp cut at the regular FOMC meeting on March 18. So far, the low point stands at 0.20% which could be reached before the November U.S. elections.
A perfect storm of supporting factors drove gold’s rally and out performance. Safe haven demand aside, it was the collapse in U.S. 10-year real yields to -0.60%, a seven-year low, sudden dollar weakness – as yield spreads to other currencies collapsed – and continued stock market weakness.
There is a clear rush to safe haven assets at the moment and gold is a major beneficiary of this situation. Monday trading saw another blood bath emerge on global stock markets.
Where the world is just trying to accept the impact this virus has created all over, another shock to the global markets was the breakdown of relations across the OPEC+ group.
As if corona virus panic was not enough, this was an add-on to rock investor confidence world over. Fears that waves of oil from Saudi and Russian wells are about to hit the market- has provided a sucker punch to market sentiment.
The ultimate safe haven asset in these troubled times is clearly gold. Its sentimental qualities are eternal, while the hard currency’s role as a hedge against inflation makes is a particularly attractive asset to buy today, Central banks have already been loosening monetary policy like crazy to support global growth over the past year. More stimuli is coming down the line following the Fed’s interest cuts of last week to offset the impact of the coronavirus, too.
That is why if you get a dip in gold prices, add to it. Dedicating your entire portfolio to one particular asset is not a wise decision. In fact, I, would rather advise investors to allot around 10-15% of their portfolio in gold so that it becomes a hedge tool.
It’s a different world altogether now. There is collateral damage on most risk portfolios and the lone survivor of gains is fold which is nearly up 12 % on global futures and 17% on local futures markets. So gold will keep on coming for massive profit taking if funding losses of other assets is needed.