How Is COVID-19 Impacting Gold Prices And Its Demand?

On MCX on Monday, gold futures (June 2020) closed at Rs 46,286 per 10 grams, nearly Rs 1,000 higher than its previous close after touching a new all-time high of Rs 46,385 in intraday trade. On Tuesday, the commodities market was closed on account of Dr Babasaheb Ambedkar Jayanti.

A surge in gold prices in India were reflective of the climb in the international market where the metal soared over 1.5 percent to its highest in over seven years on Monday. Spot gold surpassed the key $1,700 to $1,717.36 an ounce, the highest since December 2012 and is closer to its all-time high of $1,923.70 seen on 6 September 2011.

Experts believe that the metal may hit a new all-time high this year if it manages to stay above the $1,700 level in the short term and drop back to $1,500 an ounce towards the end of the year, if equity markets recover from the unprecedented crisis, reducing the appeal for the metal.

Clearly, COVID-19, its fast spread and its effects on major economies, has clearly become the factor dictating the movement in the metal's prices.

Investors forced to sell

Ideally, the precious metal is a safe haven asset for investors amid any political or economic uncertainty. It is the ultimate hedge against risks, inflation, deflation, etc as it is not tied to any government or currency, nor widely used in industries (unlike silver or palladium).

However, the coronavirus pandemic has poised itself as a unique and not previous seen crisis in modern times. The health crisis has caused a sell-off in markets. With bonds and equities fallen and investors are torn between choosing to hold gold for its potential as a safe haven investment and liquidate it to make up for the losses made in other asset classes.

In a bid to raise cash, traders and investors are selling what they can or not making new orders towards gold purchase.

At a time when the pandemic is still far from under control, cash has become king and people are worried about their future earning prospects.

The epicentre of the pandemic has moved from China to Europe and now to the US, where the number of deaths is the highest ever recorded anywhere in the world and it is hard to predict when the world's largest economy will re-open for business and how much economic damage will the delay cause to the world.

Supply constraints

Many refineries are facing restrictions in operations amid lockdowns and social distancing norms. For the first time in 100 years, major Swiss refineries that are close to corona-hit Lombardy have been shut.

Even for those who may be operating, grounding of aircraft to minimise movement has made it difficult to transport the gold for distribution towards physical purchase or to back financial instruments like exchange-traded commodities (ETFs).

The already scarce metal's supply constraints have also been keeping the prices high.

In India, sales of jewellers have come to a halt amid the nationwide lockdown that has closed down businesses that sell non-essential items.

The lower than usual demand in the two largest consumers of gold in the world- China and India, outweighs supply cuts.

Rupee's weakness

The Indian rupee has shed 10 percent in value since January and is trading above 76 against the US dollar lately. Despite RBI's efforts to stabilise the markets, the currency has continued to remain under pressure due to withdraw of foreign funds from emerging markets as the pandemic continues to spread.

Rupee's weakness makes gold expensive for domestic consumers, both physical or through financial instruments, as the country is highly dependant on imports (which are paid for in US dollar terms) to fulfill its demand.

No light at the end of the tunnel

The volatility is expected to be seen throughout the year as social distancing could become the new normal until a cure or vaccination for the disease is found. With no clear signs of an end to the pandemic, investors are looking to central banks for help and governments for bailouts. It is hard to say what's to come.