Margin Calls Across Risky Assets Putting Gold Under Pressure

  • Mar 03, 2020 AEDT
  • Team Kalkine
Margin Calls Across Risky Assets Putting Gold Under Pressure

Gold prices are under uncanny sell-off adding to the confusion amongst market participants as gold is always believed to be a hedge against “uncertainty or market risk”. However, as per one school of thought profit booking and margin calls on other assets could have led to gold bulls to book profit in gold to meet the margin calls or investor withdrawals.

Gold prices have moved in a consistent rally from $1,604.82 (low in August 2019) to the level of $2,562.18 (high in February 2020) with some corrections in between, despite record-high equity indices across the globe.

XAUAUD, AXJO, and SPX Daily Chart (Source: Thomson Reuters)


While the gold prices maintained its consistent rally, the equity indices climbed higher and higher amid the positive news flows such as trade optimism between the United States and China. The risky assets are now reeling under bear grips and precipitously falling across the globe, while gold stands tall with minimal correction.

The over-optimism, which took the global equity indices to a record high, now seems to be diminishing, and the overvalued market, as suggested by the prevailing signals such as record low yields, over heated market multiples such as price-to-earnings.

To Know More, Do Read: Does Gold Investing Intimidate you? Discover the Right Parameters for Astute Judgement

Yes, the outbreak of the coronavirus had an impact on the equity market, but early signals such as inverted yields were deeply ignored by some market participants, who are now putting the spotting hat on the coronavirus outbreak.

To Know More, Do Read: ASX Gold Stocks- A Healthy Buy for Profits?

Early Signs of Overvaluation

Gold Futures Open Interest (Source: World Gold Council)

From the above-presented figure, it could be inferred that activity across the gold futures remained spiked with open interest increasing continuously from May 2019. The higher open interest in gold suggested market optimism on gold in future, and while that remained evident, the open interest of ASX equity indices also remained high.

F&O Open Interest (Data Source: ASX)

The high open interest at the end of the month in equity indices despite higher open interest and net longs in gold suggested over-optimism across the ASX market, which further led to higher price-to-earnings ratio as compared to the prevailing interest rate environment, which many traders consider a sign of overvaluation.


Gold Futures Open Interest (Source: World Gold Council)

The early signs were weighted less by the market, and now the equity indices on ASX are under a bloodbath with the majority of indices shunning off their early gains.

Impact on ASX-listed Gold Stocks

Majority of gold stocks are now moving down despite decent to strong earnings in FY2019, and there could be three possible reasons for the same. First, the market is securing the profit wherever it can in the wake of the volatile market, which is putting selling pressure on the stocks. Second, the gold prices are going down, which is pulling down the gold mining companies along with it.

Last but not least, gold prices are looking technically strong while very well supported by current geopolitical events, such as tensions in the Middle East, the outbreak of the coronavirus, and slow down in economic activities in China, and its impact on the global trade. However, it is to be noted that the gold mining companies have built strong hedge book at a relatively lower price.

The strong present hedge book at the lower average price has caused the gold mining companies an opportunity loss, which investors seem to be fathoming out.

Chinese Economy Slows Down

The manufacturing activities for February 2020 in China fell drastically, and the China Federation of Logistic & Purchasing reported a Manufacturing PMI of 35.7 significantly below the market consensus of 45.1 and its previous reading of 50.0, while the Non-Manufacturing PMI for February 2020 stood at 29.6, significantly below its previous reading and market consensus of 54.1 and 51.4, respectively.

The fall in manufacturing and non-manufacturing activities in China has deeply hurt the Australian market due to high trade relation with the red dragons. However, for gold, it is a positive indication, and presently gold seems to be recovering after a slight sell-off.

The movement in gold prices would now be largely determined by the stance of central banks and their demand for gold in order to print money for enhancing market liquidity.

RBA Pulls the Rate Cut Trigger Once Again!

The Central bank does it again, cuts interest rate by 0.25 per cent to a historic low level of 0.5 per cent, further adding more liquidity to the system.

The U.S. counterpart is also posturing a dovish stance! The Federal Reserve of the United States recently stated that the current inflation is well below target inflation of 2 per cent, which coupled with other factors might or might not push the FED to trim the interest rate.

In its recent statement, FED Chair Jerome Powell stated that the Fundamentals of the United States economy remain strong, but the consortium is assessing the impact and risk of the coronavirus and mentions that it would be appropriate to support the economy.

The movement in gold ahead would be largely dictated by such stances of various central banks policies and investors should now monitor multiple factors before pulling in triggers on risky assets, and safe havens.

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There is no investor left unperturbed with the ongoing trade conflicts between US-China and the devastating bushfire in Australia.

Are you wondering if the year 2020 might not have taken the right start? Dividend stocks could be the answer to that question.

As interest rates in Australia are already at record low levels, find out which dividend stocks are viewed as the most attractive investment opportunity in the current scenario in our report.

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