Despite a sharp fall in the gold price in November, retreating 15% from its August high of $2075, gold has still surged 22% since the start of the year as of the time of writing.
This fabulous performance has been triggered certainly by the global economic meltdown caused by the COVID-19 pandemic. While the optimism surrounding the vaccines against the deadly virus has recently energised investor sentiment, the performance of major stock indices in recent weeks highlights the optimism and expectation of a global economic revival.
It may not be easy for the policymakers to completely revive the economy in a hurry. The printing of â€˜moneyâ€™ in major economies is testimony to the fact that the central banksâ€™ efforts are desperate to stimulate growth, but that does not provide a guarantee that the economy will turn around quickly.
Global health experts are not sure how quickly and effectively vaccines can be distributed across the globe, to put a complete brake on the pandemic.
Gold is one asset that can be considered as a perfect hedge in an investment portfolio comprising traditional financial assets. We believe the global investment community will continue to maintain its faith in gold until the global financial doldrums dissipate.
If we look at the recent November data, for the first time in twelve months, we have observed net outflows from gold ETF products to a tune of $6.8 billion. This may translate into little over 100 tonnes of gold, but the impact on the price is significant.
At present, the global holdings in ETFs are standing at $215 billion or in excess of 3,700 tonnes of gold. Imagine what may happen if 10% to 15% of this gold is sold off in 2021.
The question is, who will buy this gold? India and China are the worldâ€™s largest physical markets, and there is no doubt some of this gold will find its way to these two markets, or in a broader sense to Asia and partly, to the Middle East.
With many key markets are still experiencing an economic slowdown, physical buyers may be reluctant to buy gold aggressively, and hence, it could put enormous pressure on the price.
On the other hand, there is also a possibility that â€˜smart moneyâ€™ that is currently invested in gold could find â€˜cryptocurrencyâ€™ more lucrative. Often, money managers resort to this kind of strategy.
Turning to CFTC data, we have found that net managed money position in gold has fallen to the lowest level in fifteen months as funds continued to trim down their long positions. This is certainly not a one-off event. It may not be conclusive to say that money managers will not build fresh longs in future, but this is undoubtedly lending some early indications that the time may have come to exercise some discipline before investing.
In conclusion, this yearâ€™s gold price rally has been an extra ordinary event, in effect a perfect storm, and often extraordinary things do not repeat. The current holdings of gold ETFs in excess of 3,700 tonnes are alarming as any positive news regarding the global economy may trigger a sharp sell-off.
Investors must maintain this caution before investing, and refrain from chasing the price while the metal is on a rally. Rather, wait for a correction to buy.
(Author is Senior Analyst, Refinitiv Metals)
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