Coronavirus effect: Gold prices move up, volatility and uncertainty bode well for yellow metal

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February 24, 2020 4:15 AM

As volatility and uncertainty bode well for gold, the metal ended January with gains of 4.12% in rupee terms

Coronavirus effect, Gold prices, global economy, Coronavirus outbreak, global growth, China economic output, Brent crude Markets are already pricing in a slowdown as a prolonged deterioration increases the odds of a global market downturn in 2020. Brent crude has tumbled to multi-month lows.

The global economy started off the decade on a firmer footing with a slight rebound in economic activity. This stabilisation, however, did not persist for long as new economic headwinds in the form of the Coronavirus outbreak in China emerged. The outbreak has fueled concerns over the damage it could cause to the world’s second largest economy and an engine of global growth.

With Beijing already grappling with its slowest pace of growth in three decades, there are valid concerns that the epidemic will exacerbate the slowdown and hurt China’s economic output in the short term as it tries to control the health emergency. According to the Economist Intelligence Unit, the virus could reduce China’s GDP growth by up to 1% from the baseline forecast of 5.9% for 2020.

The supply shock from factory shutdowns in China is already affecting many industries and is threatening to disrupt global supply chains. As the virus shows signs of spreading beyond China; this adds further uncertainty as everyone awaits to see how the pandemic evolves.

Pricing slowdown

Markets are already pricing in a slowdown as a prolonged deterioration increases the odds of a global market downturn in 2020. Brent crude has tumbled to multi-month lows. Equity markets too are facing the heat. This risk-off sentiment is driving demand for gold as well as for havens including the Yen and Treasuries. Also, with major central banks expected to remain accommodative throughout 2020 to counter the dreaded slowdown, gold is likely to continue benefitting. Equities are expected to remain volatile as they react to conflicting forces of central bank injected cheap liquidity and weak economic fundamentals.

As fears deepen about the impact of Covid-19 on near-term growth, China has announced various monetary stimulus policies to stem the impact of the virus on its economy, including a move to cut rates on one-year loans to support the banking sector, adding a net 150 billion yuan ($21.7 billion) into money markets and directing banks to lend more and not call in loans to companies in Hubei and other affected regions. The measures China pursues will guide the direction adopted by global policy makers and central bankers, and in turn impact the prospects of all factories, economies and commodities that have been infected by the virus.

In conclusion, this remains a wait and watch situation and markets will remain nervous till the rate of infection does not abate. And as volatility and uncertainty bode well for gold, the metal ended January with gains of 4.12% in rupee terms.

The writer is senior fund manager, Alternative Investments, Quantum Mutual Fund

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