Macroscope: Gold – Glittering through the crisis

Introduction:

In “The Great Partition: The Making of India and Pakistan”, a Sikh woman, Taran, relates how her mother took all the gold and tied it in handkerchiefs and distributed it among different family members for safekeeping. We did not know where each of us would end up – this gold was our security.

Gold, as highlighted above, has been the asset of choice in times of trouble, and hence, titled: “safe-haven asset”. Disguising itself as tool for monetary comfort, it defined the monetary landscape during the gold standard era.

This narrative is time-tested, as even today, in times of heightened volatility, where wealth preservation is defining the investors’ appetite, Gold is soaring new highs, crossing Rs. 56,000 per 10 gm levels!

2020 has been riddled with Covid headlines across borders, as socio-economic landscape of India and the world came to a standstill. With “Fear” as market mood, and volatility its theme, indices wiped out trillions in a matter of 2 months. Indian equities went from All-time highs to their biggest drop (-~40%) in 10 years to between Dec’19 to Mar’20!

Gold’s Price Story – “Converting ‘Cry’-sis To Currency”

2020 has seen Gold’s shine get brighter as investors dump other asset classes, courtesy of Covid 19, and never-seen-before volatility levels (Higher than Global Financial Crisis!). From inflows, to price-rises, Gold is setting record numbers, day-over-day and month-over-month. As coronavirus cases surge, impeding unlocking of economies, and propagating uncertainty about the future, investor’s belief in the yellow metal sees further strengthening! The conservative climate is conducive for Gold, as investors and institutions bet on Gold, as a sign for future fears.

Graphs below highlight, Gold’s performance in H1CY2020.

As newer times dawn upon us, investors flock towards older tendencies, finding comfort in world’s most cherished metal.

Gold’s Demand Story – “Get Set GO-LD”

Our markets have been subject to crises, ranging from financial to health, for as long as there have been markets! The one common theme amongst investors during these times was their vibrant affinity for the yellow metal.

This time, with coronavirus, the “Yearn for-Yellow” (read as: Gold) has followed suit, as Gold investment vehicles record their biggest inflows……but with a twist!

On a decadal view, the growth in Gold demand has been very poor, as its 2 biggest consumers, China and India (40% of world’s population and 16% of world’s GDP) have been losing interest in its shine, as is evidenced via the stark decrease in the per capita spend on the metal.

So, you must be wondering, “If 40% of the world is moving away from Gold, then how is the price increasing?”

The answer is quite simple, “Because 60% of the world is moving towards to it”

The graphs below highlight the divide in the yellow metal’s demand drive

The relentless pursuit for Gold by international markets is a major driver for Gold demand, and hence it’s prices! The demand pull from the eastern hemisphere holds higher weight in charting the yellow metal’s desirability, covering up for the waning shortfall across the ponds by the next-tobe developed economies.

Investor Takeaway – Making Sense of The Present & The Future

As coronavirus cries translate to numbers, investors continue to shift their sentiments in limiting wealth erosion. Covid-19 has not spared, even, the Global powerhouses as can be seen below:
➢ US economy suffered its worst quarter since WWII as GDP, shrinking by 32.9%.
➢ UK hit by worst contraction in 41 years, shrinking by 2.2%.
➢ Germany sees deepest decline on record, shrinking by 10.1%

All hopes are now lying around the hypes of vaccines! If trials are deemed unsuccessful, then the rush for Gold may amplify, with no respite for other asset classes, in the short-term at the very least.

A few key factors driving the current Gold demand and its future appetite are as follows:

1.  Insurmountable Covid-19 Case Count

After hearing of it in December 2019, the coronavirus case count has increased multifold to ~20 Million people today. The world continues to struggle with capturing and containing the virus. As an example, the world’s largest economy, USA, too has succumbed to it, recording 50K+ cases for 8 straight days, at the time of writing this piece.

Here is a graph to help visualize the virality of the Coronavirus

As seen above, Coronavirus continues to spread like a wildfire, trumping the collaborative efforts of the world in combating it. As road ahead gets foggier, the preference for Gold over asset class will continue to grow, driving demand and prices upwards.

2. Redundancy in Relief Packages

As the world went into a lockdown, in response to the rising and resilient virus, Central banks started designing an exit plan. The lockdown was a harbinger for upcoming economic stress, as global research bodies cut away all optimism, chartering documents highlighting expected economic contractions.

The covid 19 fears took shape via massive dumping of equities across the globe, witnessing unprecedented downswings. In response, central banks expedited announcement of relief packages announcements, as is shown below:

Relief packages were styled poorly, and hence, deemed unfit to tackle the economic locks, further aggravating investor tensions, making bullion more attractive as the safe-haven asset.

The very real, and just as immediate, recessionary fears continue to make for a perfect dwelling ground to sustain, and possibly grow, the current affinity for Gold in the short-to-medium time frames.

3. Near Zero Levels Interest rate + Diseased Dollar

Gold’s allure has become louder in today’s times, as concerted expansionary policies, and asset purchases by central banks, keep interest rates at historically low levels. Gold can act as inflation-hedge with debt ballooning across borders, while simultaneously being subject to incredibly low costs of holding. This can pave way for more demand, as we realize world-wide economic shrinkages.

As the world’s current reserve currency, US Dollar, witnesses its biggest fall in a decade, Investors reprise their faiths in the old-school system, re-aligning their monies in the yellow metal.

Uncertainty and speculation go together, with retrospect being the best teacher! Like has always been the case, Gold’s attractiveness as an investment, tends to be very robust during weaker economic periods. With low visibility ahead, there is new life to this temporary temperament towards the shiny metal. Gold’s ability to provide psychological comfort in times of stress will always (arguably) make it the de-facto money-pit choice.

The adage, “Old Is Gold” certainly commands merit, and now, we know why.