In the current quarter, volatility has emerged again; gold first hit $2,072 and silver $29.83 in the first week of August, and then we have seen a sharp correction.
By Debajit Saha
While the first quarter of 2020 remained extremely volatile for precious metals, the second quarter remained relatively stable. Both gold and silver maintained their upward journey as investors reallocated funds into both of these metals to safeguard their portfolios amidst the economic uncertainty caused by the COVID-19 global pandemic. In the current quarter, volatility has emerged again; gold first hit $2,072 and silver $29.83 in the first week of August, and then we have seen a sharp correction. The price recovered, but this time failed to scale the same heights that it touched in August, and now, there is a sharp sell-off again. More than gold, silver has suffered and now it has created serious suspicion among retail investors. Is the dream run over for precious metals?
Central banks around the globe have come out with unprecedented stimulus to counter the economic slowdown caused by the COVID-19 pandemic. Interest rates have been kept either at historical low levels or in negative territory to create demand in the financial system and to stimulate growth. We, therefore, expect a strong demand for gold as a safe-haven asset to continue, at least until we see that the global economy is back on a solid recovery path. It appears that investors had become increasingly cautious, even before the pandemic gripped the global economy. Slowing economic growth in the United States in 2019, along with the US-China trade war, unsettled investors’ confidence in the world’s largest economy. The yield on US 10 Yr Treasury Bond fell below 2.5% in the first quarter of 2019 and it continued to fall thereafter. Ideally, a yield above 2.5-3% is regarded as a sign of positive investor sentiment. At present, the yield is below 1%, which implies low investor confidence and is one strong reason for the strong performance of the yellow metal this year. Until the yield reverts to over 2.5%, gold and silver are expected to continue its bullish trend.
The current sell-off is triggered by fear of another lockdown in major economies and concern that the global economy will take much longer time to recover than previously estimated. This sell-off took place in March and early April when investors scrambled for the dollar and liquidated positions in assets all across. What we have observed as of now, is that no major sell-off has taken place from ETFs in both gold and silver. This emboldens our belief that investors with long-term view still believe there is a great value left in precious metals and this sell-off could be utilised to invest at a lower entry point.
At the time of writing, gold has taken support near the 38.2 percent retracement ($,1833) on the Fibonacci scale measured between the March low and August high. If this support holds, gold could climb back to the $2,000 level. Below $1,833, $1,790 and $1,750 are two important supports to look to. However, it could be a little difficult to go back to these support levels. In the case of silver, it will follow the yellow metal higher, and in our view will recover most of the ground it lost recently. The weight of institutional money flow is still positive in silver, which could work as a catalyst to arrest the current sell-off and eventually bounce back. Silver is a relatively small market which makes it possible to outperform gold but that does come with increased volatility. This also makes the metal more vulnerable than gold to speculators and short-term investors. Retail traders should avoid short term speculative trades in silver or fear having their fingers burnt.
(Debajit Saha is a senior metals analyst at Refinitiv. Views expressed are the author’s own.)