Why is Gold a Consensus Buy and Why are Money Managers Buying It?

  • Mar 30, 2020 AEDT
  • Team Kalkine
Why is Gold a Consensus Buy and Why are Money Managers Buying It?

Gold is again back as the poster boy post rebounding once again from its psychological level of USD 1,500 per ounce. Gold just like any other asset has been impacted by the unprecedented economic and financial market conditions, with the price falling to USD 1,451.50 (intraday low on 16 March 2020) as massive liquidations across all assets, and likely magnified leveraged positions and rule-based trading unfolded.

However, post the fall, gold prices skyrocketed once again as the United States moved with a USD 2 trillion stimulus bill proposal, leading to a slight sell-off in thedollar, accumulated by the investing community for hedging purposes.

To Know More, Do Read: Massive Move on Gold; USD 2 Trillion Stimulus Bill The Game Changer?

The recent recovery in gold took the spot to USD 1,647.28 (intraday high on 26 March), and gold is hovering around the same level. While the recovery has brought back gold on to the cover pages newspapers, what most of them are missing is that gold is catching up on its historical behaviour with every new move.

Gold prices are now somewhat closely mimicking the movement of 2008 financial crisis, which should come as no surprise for the investing community, as classical behavioural finance theory explains that the market reacts in the same manner when exposed to a similar situation, and presently, the reason might be different, but the end result at the market is the same, i.e., Chaos!

Also Read: The Antecedence of Gold Rally; Gold To Mimic The Lehman Crisis Move?

So does that mean, gold would again show a new glorious peak as it did after the 2008 financial and Lehman brother crisis in late 2011?

Well, we would say it is anybody’s guess, and albeit, nothing could be assured as such due to the rapid change in the relative inputs behind the gold price behaviour, we would try to analyse some market data to interpret, where goldcould head next.

The global economy is well poised to see some negative impacts from the COVID-19 outbreak, which could decelerate the global economic growth ahead, which would undoubtedly impact gold consumer demand, leading to higher volatility, especially considering the fact that jewellery demand constitutes close to 50% of the gold consumption.

However, the high-risk levels associated with various other assets along with widespread negative real rates and quantitative easing could support the higher institutional flow in gold for hedging; thus, improving demand as a safe haven.

Despite its current volatility, gold is a valuable asset for the institution and retail investors as a safe haven, and such volatility is not uncommon in gold at the time of disorderly market or financial distress. For example, at the onset of the global financial crisis in 2008, gold had experienced many pullbacks, leading to a fall in between 15 to 25 per cent in USD terms.

So, the recent fall in gold was mainly due to the higher liquidation demand to cover for the margin calls of other assets, as explained by us in our previous article.

To Know More, Do Read: Margin Calls Across Risky Assets Putting Gold Under Pressure

Not just gold, the recent hoard for meeting the margins on falling assets, which is on an average hard for an individual investor to drop, due to psychological bias, led to a fall in the United States treasuries prices as well, despite a second unscheduled cut by the Fed on 15 March, which took the Fed funds rate to pre-2016 levels.

The liquid asset gold has come handy for many to raise cash, especially since it was – until recently – one of the few assets with positive returns this year.

 

CBOE VIX and XAUUSD Monthly Chart (Source: Thomson Reuters)

CBOE VIX and XAUUSD Monthly Chart (Source: Thomson Reuters)

 

Note, how in the above chart, the first spike in VIX (market volatility) led to a fall in the gold price, and the latter spike in VIX led to a uptick in the gold price. The same has happened recently, and now the relationship between VIX and gold is turning positive, reflecting that higher volatility in the market would now support the gold price to some extent.

Many industry experts anticipated that it might take a while for financial markets to stabilise amidst of such volatility, which could provide gold with additional upswings, and the present heightened risk and lower opportunity cost is a further blessing for gold going forward.

What to Expect Ahead?

The main four drivers, which could determine the next move in gold, would be the opportunity cost, economic conditions, risk and uncertainty, and momentum. So far, over 30 central banks across the globe have slashed the interest rates to bring more credit and liquidity into the financial market.

Also Read: Is FED Running Out of Bullets in Bringing Down The COVID-19 Impact? Oil Market Yet Under Duress

Apart from that, various governments are committing billions and in few cases in trillions of dollars to provide a cushion to the halted economic growth; however, ballooned budget deficits, negative real rates, and currency debasement could ultimately present an opportunity for gold, as money managers, pension funds could seek gold as a safe haven.

Central banks also poised to again remain net buyers for gold, albeit the rate might not be as aggressive as it was in 2019, which could also support the gold price ahead.

Money managers are already holding large net buy positions

As per the data from the World Gold Council, the money managers are already holding 685.89 tonnes of net longs in gold, which represents ~ 69.75 per cent of the overall net longs across global gold exchanges, which stands at 983.28 tonnes (as on 20 March 2020).

 

Global Monthly Net Longs (Source: World Gold Council)

Global Monthly Net Longs (Source: World Gold Council)

 

Whilethe net longs are currently holding high, different gold futures exchanges are seeing high open interest in the market, suggesting that the money managers remain net buyers of gold, which could further support the gold price ahead.

 

Global Exchanges Open Interest(Source: World Gold Council)

Global Exchanges Open Interest(Source: World Gold Council)

 

While an array of various factor supports the outlook for gold, investors should remain cautious of various measures, currently being taken by the central banks and various governments, as these measures andovernight announcements, coming into the picture recently, could whiplash your return on gold with high fluctuation in the price change, which some investors might or might be able to bear, which in turn, despite a brighter outlook, could ultimately leave you empty-handed.

Thus, timing is everything in the prevailing scenario, and psychological barriers to see large fluctuation in prices should not hamper your judgement and trust in the above-stated factors.

So, pull your trigger wisely, Happy Investing!


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