Overall, looking at the current scenario, we are bullish on the gold for the year. We expect the MCX gold to continue to make new highs.
- By Jigar Trivedi
The year 2019 ended on a high note due to a trade war between the U.S. & China, Central bank buying of gold as a reserve (China, Russia, Kazakhstan, Poland & Turkey), ETF investment buying (SPDR Gold) and Fed’s U-turn on policy. January 2020 witnessed a spark of geopolitical tensions between the U.S. and Iran when the U.S killed Iraqi military high command in an airstrike and the bullions, gold in particular, ended January on a positive note. However, a major trigger for a rally in gold in the 2020 year to date was COVID-19 which later turned out to be an epidemic. (COrona VIrus Disease 2019., since the first case was found in 2019 in China). Overall infected cases till now have crossed 1900,000 across the world. Nearly 119,000 have died. The US is the new epicentre of pandemic. Majority of the countries have reported cases, globally trade has halted, the World Bank, IMF has spoken of recession in 2020 due to this epidemic.
The Fed stimulus has turned out to be a magnet for gold. The Federal Reserve has taken unprecedented actions to save the economy during the coronavirus crisis. The US Congress has passed $2 trillion in rescue efforts. Fed’s announced stimulus of $2.3 trillion after jobless claims in the US hit the roof.
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- March 3: Fed announced an emergency 0.5 percentage point interest rate cut.
- March 15: Another 1 percentage point rate cut, taking the Fed’s benchmark for short-term lending down to near zero.
- March 15: at the same time as the second rate cut, the Fed lowered the rate for banks to borrow at the discount window by 1.5 percentage points and cut the reserve requirement ratio for banks to zero.
EU finance ministers also agreed on half-a-trillion euros worth of economic support but left open the question of how to finance recovery in the bloc headed for a steep recession. Meanwhile, major physical bullion hubs in London saw activity dwindle due to coronavirus-led restrictions, with strained supply chains cut off from soaring safe-haven demand in some regions. That’s the reason why the London (spot) & New York (Fut) spread continues to hover around the $55 mark.
OUTLOOK: Overall, looking at the current scenario, we are bullish on the yellow metal for the year. We expect the MCX gold to continue to make new highs. We believe, since recessionary fears due to coronavirus have taken full control of the financial markets world over, the safe-haven buying into the gold will continue. Already it is an election year in the US, hence, the political risk is another positive trigger for the gold. The yellow metal is likely to rise on fears of a steeper economic downturn and amid massive liquidity measures by global central banks.
Having said this, rally in silver may not be as confident as it was in the gold. Silver enjoys a dual cap. Being widely used in industries also, it does take some cues from the base metals fundamentals.
But we know due to coronavirus, the international trade has paused, manufacturing PMIs of all advanced countries have nosedived, investor confidence has tanked, several countries have called for complete shutdown, we feel silver may disappoint the investors at the moment. Hence we recommend to stay cautious in silver.
(Jigar Trivedi is Fundamental Research Analyst – Commodities at Anand Rathi Shares and Stock Brokers. Views expressed are the author’s own)