PETALING JAYA: Demand for gold is expected to be lacklustre in the near term, underpinned by suppression from dollar-funding stress and a projected deflationary impact from the Covid-19 pandemic, according to a report by CGS-CIMB.
“We believe gold could rally a bit further from here, in line with the rebound in global equities. However, another round of risk aversion could bring the price of gold down again, together with equities,” it said in a report.
The research house noted that unless the pandemic is contained suddenly and soon, the shutdowns are likely to damage gold’s current and future demand 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 cash flows.
“That 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. Eventually, gold will shine again, but not while deflation and dollar funding stress remain dominant concerns,” it said.
The research house pointed out that the negative correlation is likely to continue as long as Covid-19-driven risk aversion persists.
At the same time, gold prices have also retreated 15% to US$1,451/oz on March 16, from a peak of US$1,703/oz on March 9 – a move which has left investors puzzled.
“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 March 19, gold bottomed and rallied along with the S&P 500. This raises questions about the usefulness of gold for portfolio diversification in this environment,” said CGS CIMB.
Meanwhile, it also observed that the investors have been widely reported to have been liquidating their gold positions to meet margin calls on equities.
However, post-pandemic, it noted that the prospects for gold is still unlikely to perform well, as the immediate aftermath of Covid-19 is likely to be deflationary.
The research house said physical wars destroy capital/productive capacity and the end of war releases demand – hence creating excess demand relative to supply, and hence inflation.
“The ‘war’ against Covid-19 however destroys demand while leaving capital/productive capacity intact and idle. Moreover, it destroys more than just the current demand. Covid-19 is also destroying savings and wealth, or future demand. We believe Covid-19 is likely to be deflationary in 2020 and possibly 2021,” it said.
For now, CGS CIMB said cash is king, especially the US dollar as demand is still high.
“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,” it added.
Nevertheless, at some stage in the future, as central banks print more and more money in an attempt to inflate away the debt that their shareholders in the government have accumulated, there will be inflation and a time for gold to shine.
source https://www.thesundaily.my/business/demand-for-gold-to-remain-lacklustre-for-time-being-research-house-GL2287484
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