INTERVIEW: Triggers for gold already priced in, says StoneX Group

Thursday, Jun 25, 2020


By Roshni Devi


MUMBAI – In today's times of a worsening pandemic situation and geopolitical tensions, price of gold has sky-rocketed due to its safe-haven appeal. With increasing uncertainties, price forecasts for the precious metal have been going through the roof – from $2,000 to $3,000 an ounce to a highly optimistic $10,000.


While prices have indeed risen 37% from a year ago, gold has yet to touch the crucial level of $1,800 an ounce so far this year. After having touched $1,780 in April, gold prices have been witnessing wild swings, going very close to the coveted level at times but then falling short.

Rhona O'Connell, StoneX Group's head of market analysis for Europe, the Middle East and Africa and Asia, says gold is stuck below the crucial level because most of the supportive factors have already been priced in.


StoneX Group, earlier known as INTL FCStone, is a US-based financial services firm that monitors trends in the commodity markets.


"There is not much else that can come in to drive it much higher apart from unwelcome escalation of external weaknesses," she told Cogencis in an email interview.


Gold prices hit a near-eight year high of $1,796.10 an ounce on Wednesday and are currently around $1,779 an ounce.


Tracking the global trend, prices in India also hit a record high of 48,589 rupees per 10 gm on Wednesday.


But the high prices and economic uncertainties have kept customers away so far this year.


However, O'Connell expects a favourable monsoon to lead to pick-up in buying later this year.


Below are edited excerpts of the interview:


Q. Many analysts have forecast that gold prices will hit $2,000/oz this year. But it is still finding it difficult to top $1,800. What's holding it back?
A. The primary reason for this is that the risk-related premium from the virus is already priced in. There is no doubt that all the tailwinds are still in effect, and that geopolitics (geopolitical tensions between the US and China, India and China, North and South Korea, and Saudi Arabia and Yemen) are taking an increasingly important role now. Also, there is massive amount of liquidity in the markets. This latter factor is usually supportive for gold, as it means there is cash looking for a home, but this time it is also supporting the equity markets, which are otherwise overvalued given the economic outlook. Also, without those liquidity injections (by central banks) the financial markets would potentially be unstable. All of these factors are already (built into) in the price.


On top of this, a number of leading fund managers have said over the recent weeks that they are bullish on gold, which suggests that they were already positioned in the market before going public. With all these factors already priced in, there is not much else that can drive gold much higher except for unwelcome escalation of external weaknesses, especially as the Asian markets, which absorb over 70% of gold physical fabrication in a nominal year, are currently non-existent.
Q. In this extraordinary year for the global economy because of the COVID-19 pandemic, how do you see investors look at gold – as a safe haven asset or investment?

A. They are effectively the same thing. But if "safe haven asset" is for these purposes defined as a means of strengthening a portfolio and as an insurance policy in case of distress, while defining an investment as a mechanism for capital gains, then it would evidently be both of them, but with more of an emphasis on the former.
Q. Physical demand from China and India has almost dried up. How will this affect prices? When do you see demand from these two nations picking up?
A. If Asia were active in the market, then in theory, the price of gold might be $30 to $50 higher, but the overall trend would not be much changed as it tends to be dictated by the movement of professional funds, given the massive turnover in the markets. We don't expect much large-scale activity from India until after the monsoon. Monsoon is currently believed to be a good one, so there should be a good harvest. This should aid demand for gold. Demand dried up last year, well before COVID, and after 40 years in the market, I have never seen it take such a long time (in 2019) for it to recover. In fact, it really didn't recover at all, because of a) price response and b) economic fears due to the uncertainties that were developing in the markets, notably, US-China trade talks.


Clearly, the same applies to China. Demand from China may not come back for a number of months either. There is a little interest, but this is due to heavy promotions and price discounting. When the jewellers have worked off their pre-COVID stocks, they will have to take those discounts away. Also, with carat jewellery taking market share away from the 9999 purity metal, part of the demand is for adornment rather than investment purposes, and therefore it will not be at the top of the shopping lists when people start to spend money again. The very high quality investment grade jewellery may come back more quickly, though.
Q. Gold purchases by central banks have begun to ease. What is the trend in 2020? Will more central banks be forced to sell gold?
A. That is only because Russia has reached its 20% limit and China is watching its forex activity. Venezuela wanting to sell is something of a one-off, but there is little sign of distress selling elsewhere. If anything, we should probably expect continued purchases by countries looking to diversify away from the dollar, most of which are in eastern Europe.


Q. Gold exchange-traded funds have seen some outflows of late. Will they be the favourites of institutional investors or will there be a shift to equities?
A. No. Gold ETFs are solid gold-backed instruments, while equities are different. In a bull market, gold equities will outperform gold because of the gearing effect (because they have production costs etc). But they also carry risks–lockdown due to COVID is a case in point. But there are number of things that can go wrong at a mine or in the country where it is located, while there is also a risk of human error in management plans. So they carry more reward, but by definition they also carry more risk.
Q. Silver has not fared as well as gold due to its industrial link. What is the outlook for silver?
A. If gold were to go into another full-fledged bull market, silver would almost certainly go with it and the ratio would contract because of silver's higher volatility. But if gold is only gradually rising, or even flat, then silver would be more likely to follow the patterns of the base metals. Silver's physical demand is 52% industrial and 80% of its supply is price-inelastic. So silver will remain volatile and unpredictable unless gold is in full flight, in which case silver will rally further.  End


US$1 = 75.66 rupees


Edited by Ashish Shirke


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This copy was first published on the Cogencis WorkStation

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