Many investors were forced to liquidate gold positions in order to raise cash to cover losing equity and to meet margin calls.
- By Jigar Trivedi
In the wake of equity market correction, gold has been volatile and the short-term trend is still uncertain. But there is little doubt that its intermediate-term outlook will benefit from growing demand among investors looking for insurance against a weak global economic outlook.
While gold has mostly benefited from safety-related demand over the past four months, it was briefly caught up in the panic selling surrounding the US coronavirus outbreak in early March. Many investors were forced to liquidate gold positions in order to raise cash to cover losing equity and to meet margin calls. This resulted in the gold futures price dropping 13% over a 6-day period last month.
However it bounced back and recovered almost all of its losses in just a 3-day period. The speed and intensity of this upside reversal highlighted investors’ recognition that, once margin calls and forced liquidations were over with, gold is one of the safest places for their remaining assets to be parked once the financial market storm finally ends.
There’s plenty of demand from investors around the world who are desperately seeking portfolio protection as coronavirus and recession fears continue to mount.
The US FED’s all-out attempt to provide as much liquidity as the financial system needs in this time of crisis will ultimately bolster gold price. The Federal Reserve recently stated that it would buy Treasury bonds and mortgage-backed securities “in the amounts needed” to ensure that credit markets remain stable, including $1.5 trillion worth of short-term loan offerings to banks to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak.
In conclusion, investors should be prepared for choppy behaviour from gold price in the very near term as the market remains vulnerable to coronavirus-related developments. Yet a bullish intermediate-to-longer-term outlook for the metal is reasonably certain based on the historical connection between past financial crises – and subsequent Fed QE efforts – and higher bullion price. Investors are therefore justified in maintaining a bullish intermediate-term posture toward gold.
(Jigar Trivedi is Fundamental Research Analyst – Commodities, Anand Rathi Shares and Stock Brokers. The views shared are the author’s own.)