The future of one of the most precious of metals in the world can be greatly affected unless the Covid-19 pandemic is contained soon.

CGS-CIMB Research in its Asia-Pacific Strategy note on April 17, said that the economies shutdown (even on and off) can impact current and future of gold.

“The market performance of gold in the midst of the Covid-19 crisis has left its fans a little puzzled. From a peak of US$1,703/oz on 9 March, gold retreated to US$1,451/oz on 16 March – a 15% decline. And of concern to asset allocators, the price of gold has tended to move in line with equities since late-Feb. When VIX peaked and turned down from 19 March, gold bottomed and rallied along with the S&P 500. This raises questions about the usefulness of gold for portfolio diversification in this environment,”

They also added that while the market digests the damage to the global economy caused by Covid-19, gold is unlikely to perform well, with the impact of the shutdown at least initially being deflationary in nature.

CGS-CIMB explained that physical wars destroy capital and productive capacity, and when they conclude, release demand, creating excess demand vis-à-vis supply, resulting in inflation.

 “Some time in the future when central banks print more money in an attempt to inflate away the debt that their shareholders in their respective governments have accumulated, there will be inflation and gold will shine in such conditions. Gold will shine when investors lose confidence in the US Dollar. Right now, the reverse is true. There is still high demand for the US Dollar. And if risk asset markets resume their declines, there is little reason to hold gold. The value of everything else will then fall relative to cash,”

Gold supply halted by the Covid-19 pandemic

Investors in Malaysia who are looking to acquire gold may experience some difficulty in getting their hands on this precious metal as a supply halt caused by the global lockdown to combat Covid-19 is made worse by a recent surge in demand here.

People flocked to gold even as physical prices’ premium to paper price more than doubled, a scene witnessed globally and in Malaysia, as production in major mints hit the brakes on production and revised selling prices, traders said.

KH Lau, the founder and managing director of gold trading company, Rolling Silver Holdings Sdn Bhd said that in the previous rush, investors were chasing gold for the price upside, and mints were open for sale. Currently, investors are also buying due to fear, but the mints are not producing new supplies.

“We have no certainty when the mints will reopen to accept new orders. This is the major uniqueness,” said him.

Rolling Silver, which operates BuySilverMalaysia.com, had sold out 90% of its inventory by March 17 — the day before Malaysia enforced the ongoing movement control order.

According to the Malaysia Bullion Trade founder, Dean Arif, a few months’ worth of sales happened in the last three days before the lockdown was enforced.

“It was maybe a ten-fold increase in demand and we already informed clients that we are out of stock of all physical gold and silver until end-April,”

Gold prices have been caught in a see-saw between safe-haven flows and liquidity needs amid high volatility in the wider markets and uncertainties in the global economy. The US dollar, meanwhile, has been retreating as the US Federal Reserve sought to address liquidity concerns, with another quantitative easing measure en route.

At US$1,610.60 (RM7.026.24) per troy ounce (31.1 grams) at the time of writing, gold spot price had retreated some 2% in the last 30 days but is up over 24% over the one-year period.

Overall

Unless Covid-19 is contained soon, the shutdowns – even on-and-off shutdowns – are likely to damage not just the current demand but also the future demand for gold through higher debt levels. The impact will be deflationary, which has historically worked against the price of gold. Risk aversion is also likely to return if economic shutdowns continue/resume.

The sudden halt to business means severe disruption of Dollar cashflow. This will drive another round of Dollar funding stress, driving the US Dollar Index higher. Historically, that has tended to work against the price of gold.

The market is quite difficult to balance out because we will need to see how serious the lockdown is around the world, as it affects all jewellers, manufacturers, traders, and retailers. It is reasonable to assume that once the worst peak of the panic caused by the Covid-19 subsides, factories will re-open, air traffic normalises, and the gold market will return to normal.

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