Gold prices set to plummet along with stocks

As volatility continues to roil financial markets, the price of gold - directly but surprisingly correlated to stocks - will remain under pressure and hit new lows in the backdrop of a looming global recession and low inflation, precious metals experts and economists said.
Gold prices, which contracted by around 10 per cent last week after a short rally, is likely to plummet to $1,300 from its current $1,505 an ounce level in the second quarter as the global economy succumbs to the devastating impact of the Covid-19 pandemic with a possible impending recession, bullion watchers said.
The scenario appears nightmarish with the unprecedented magnitude of the virus assault on global markets, which has prompted most analysts to predict the worst global crisis since 1929. Analysts said the safe-haven metal's surprise positive correlation with stocks is not quite unusual as normally when stocks go down, gold prices go up.
"However, this time, the fortunes of both stocks and gold are positively correlated as the current financial crisis is about weakness in all asset classes amid a huge desire to own cash, particularly in the strengthening US currency," analysts said. "In addition to the massive demand for the dollar, which tends to lower foreign demand for dollar-denominated gold, investors also had to succumb to stock market margin call selling. In other words, rather than blow out of leveraged stock positions, investors sold gold to raise the cash needed to stay in stocks," said James Hyerczyk, an author and senior editorial team member with FX Empire.
"The surprising direct correlation between stocks and gold is likely to continue until investors feel the liquidity crunch is over. The first sign of this will be profit-taking or a sustainable break in the dollar," said Hyerczyk. "If the dollar starts to weaken then look for demand to pick up for gold. Any rallies are likely to be tentative at the start because traders are still going to be nervous," he said.
KC Chang, precious metals analyst at IHS Markit, said that he sees gold prices falling to $1,300 an ounce in the coming weeks.
"Our outlook for gold is much lower when looking at the second half of the year, as investors continue to hoard cash," he said.
Chang said if economic projects continue to weaken and are worse than economists are expecting, then gold prices could even fall back to 2015 levels, when gold prices bottommed out at $1,050 an ounce.
The current low US real interest rates are probably not enough of an incentive to stop the decline in gold. "With so much wealth destruction in the marketplace, investors might not have enough free capital to diversify into gold. "You will see some upward price volatility in gold as a safe-haven asset, but many retail and professional investors will be struggling to find the funds to buy gold," Chang said.
Georgette Boele, senior precious metals strategist at ABN Amro, expects financial markets to remain in a risk off mode in the coming weeks and months, which should result in more dollar strength and gold price weakness.
"We expect that investors will liquidate more speculative net-long positions and ETF positions. Therefore, we expect a more pronounced weakness in gold prices than in other precious metal prices," said Boele.
Gold has declined lately despite a favorable fundamental backdrop for the metal, such as looser monetary policy, lower bond yields and volatility in stocks, Credit Suisse said. The pullback in prices was due to liquidity needs of investors needing cash as so-called risk assets tumbled, analysts said.
"We expect near-term gold prices to remain under pressure for this reason, before rebounding on fundamentals," Credit Suisse said. "Recall that a similar dynamic occurred at the beginning of the 2008 financial crisis when gold fell 25 per cent before rebounding sharply and reflecting the loose monetary policy."
Other supportive factors for the gold include the potential for a weaker US dollar and increased central-bank demand, Credit Suisse said.
- issacjohn@khaleejtimes.com