Gold prices surge as investors hunt safer havens; is there some steam left in this rallying engine?

April 23, 2020

London (Apr 23)  Majority of the commodities especially crude oil has been the worst place to park your money in the highly prevailing global lockdown to fight COVID 19. However gold has been an exception due to the risk-off situation. Gold normally tends to act as a safe haven asset in times of global worries. Spot Gold denominated in US dollar has registered a gain of more than 12% and MCX Gold has gained by more than 18% since December 2019 till date. The difference of almost 6% between Gold denominated in dollar and MCX gold is mainly due to Rupee’s depreciation against the US dollar. In the same period, Rupee depreciated almost 7% against the US Dollar.

Other than gold, all other commodities have seen a fall with Brent crude registering a massive 68% dip since December 2019 whereas LME copper fell by approx. 17%. Even Silver that has 60% of industrial properties witnessed a dip of almost 10% in domestic markets. Benchmark equity index the Dow Jones industrial average fell by nearly 18% whereas the Nifty 50 Index lost more than  24%. Looking at the recent performance it has indeed become very important to consider gold in one’s portfolio in order to balance the risk-adjusted return.

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Now what lies ahead needs to assess in order to make an informed decision. Gold expected to perform as the current uncertain scenario coupled with geopolitical tension in the background might lend the required support. Sharp inflows in the global gold ETF’s indicate that investors are worried about the riskier assets and are moving more towards the safe havens. As per Bloomberg, the world has pledged more than $8 trillion to fight COVID19. Experts believe $8 trillion is not going to be enough and more stimulus measures by the global central bankers might be required. This will create inflationary pressure going ahead which again is supportive for gold as the yellow metal is traditionally a good hedge against inflation. However, one should be cautious as one of the hurdles in gold’s rally might be the period when the virus gets contained and that might see some offloading of gold long positions.

Economically sensitive commodities like energy and industrial metals might trade with a downward bias until the virus situation is contained. Once the virus situation is contained and the lockdown restriction lifted, we will have to assess the situation as it might take a lot of time to get the demand and supply on balance.

To conclude global uncertainty and risk-off scenario is ideal for gold’s bull rally. However, we cannot rule out some speed bumps in gold’s rally.

FinancialExpress

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