Gold monthly view for June 2020

Posted On Thursday, Jul 02, 2020


The world is facing a crisis of lives and livelihoods that seems to be worsening with every passing day. Worrying statistics of Covid-19 deaths and rising joblessness pop up on our TV and mobile screens. And yet financial markets seem to signal that “all is well”.

Well, this is a classic case of treating the symptom, and not the cause. In spite of rising infections, global policy makers have lifted lockdowns and thrown cash at the economic effects of the pandemic in a bid to restart economic activity.

Investors who sensed the risks of this policy response, are preferring to invest money in assets like gold. Flows in Gold ETFs have set a new annual record in just 5 months. Gold prices were stable through most of June balanced between geopolitical tensions and further waves of infections on one side, and hopes of economic recovery and dollar strength on the other. But investment demand for the metal shot up by the end of the month and prices settled at $1780 levels, 3% higher m-o-m. Similarly, riding on the back of a depreciating rupee, Indian prices calculated with GST hit a record high of Rs 50,000 per 10 grams.

A crisis of confidence facing the economy

Contrary to expectations, re-opening of the economy didn't have much impact on economic activity. The Flash Purchasing Managers Composite Indices (PMIs), a leading indicator of economic activity, for the major developed economies of US, Eurozone, UK and Japan still indicate contraction in June.

This can be traced to a lack of confidence amongst consumers and businesses which is damaging key economic pillars like consumption, hiring, and investment.

As long as people are scared of the disease and uncertain about their income, it looks unlikely that they will get back to spending like they did before the pandemic. Businesses too will be nervous about restarting normal operations and rehiring.

The extent of economic damage on businesses and thereby on employment and wages has been severe.
The destruction of real wealth caused by the lockdowns will ensure that the recovery is shallow and short lived. The fact remains that central banks and Governments cannot make up for the decline in real wealth.

Thus, a quick rebound in economic activity seems unlikely in the near future. This will cap gains in equities and keep the increased investment demand for gold intact.

Risk of another correction in asset prices

The International Monetary Fund too recently acknowledged the big disconnect between the optimism in financial markets around the world and the real economy. Though the IMF has further lowered its outlook for global growth, markets are betting on a quick recovery, which is most likely based on the liquidity tsunami and expectations of continued support by central banks. This mispricing of risk and resulting rally in the equity markets could derail as and when the ground realities emerge or risk aversion returns. Gold could be an effective portfolio diversifier in the case of another stock market correction.

Low yields limit bonds’ role as diversifier

The coronavirus pandemic is expected to impact economic activity for years to come. This tells us that monetary and fiscal policies around the world will continue to be accommodative to boost GDP growth. Central banks continued to remain accommodative for six years following the Global financial crisis of 2008 and this is many times more severe than that. Thus, bond yields and short-term interest rates are bound to stay low in nominal terms and negative in real terms for the foreseeable future. Such low yields will limit bond markets’ ability to act as a hedge against equity price volatility and at the same time minimize the opportunity cost of holding zero-yielding gold. This trend will be bullish for the yellow metal.

Weaker dollar and inflation on the horizon

The massive monetary policy easing and never seen before government relief packages have helped dodge an economic collapse. The spike in monetary inflation as a result of the rapid money creation from the central bank could result in more price inflation this time. Unlike the Global financial crisis where new money creation went to banks and financial institutions, this time it seems to be trickling fast to the real economy with Fed awarding handouts, paycheck protections etc . The monetary inflation could also result in a weaker dollar. The dollar has weakened more than 5% after scaling to highs of 103 levels in late March and this has strengthened the current gold rally. A weaker dollar and high liquidity could result in higher commodity prices as well and therefore could be inflationary. Gold, known for preserving purchasing power, will become a preferred asset in such times.

Easy money sowing the seeds of the next crisis

While a loose monetary policy is crucial to bring the global economy back on its feet, a sustained period of extremely low interest rates will hurt banks’ profitability in the coming years. Businesses might find it hard to service debt in a low aggregate demand environment. Thus, potential credit losses resulting from insolvencies could also test bank resilience.

In addition, national debts of governments are mounting as they try to counter the economic damage of the Great Lockdown. For instance, The US national debt has just reached 120% of the country’s GDP. The debt has jumped a massive $2.5 billion in a mere 3 months to touch $26 billion.These debt loads not only impact the economy's potential to grow but continue to weaken the purchasing power of fiat paper currencies. Such never-seen-before expansion of balance sheets could lead to defaults and debt crises, especially in the weaker economies. And evidently, gold would indeed be a big beneficiary when a crisis plagues the world's reserve currency.

US-China decoupling

President Trump has threatened that the U.S. could pursue a “complete decoupling” from China. The two countries are the largest trading partners in the world. Bilateral trade between the economic giants had already decreased by 15% in 2019 on account of the trade wars. A further detachment could damage global economic recovery at a time when international trade is already affected.

With Republicans and Democrats agreeing on this opposition to China based on Beijing’s handling of Covid-19, technology-based spying, human rights abuse and its controls on Hong Kong, the decoupling seems to have become a certainty regardless of who wins the 2020 elections.

This will have consequences for global order and wide-reaching economic effects. The resulting uncertainty in equity, credit and currency markets will trigger a risk-off sentiment. This will push up investment demand for relatively safer alternatives like gold.

Rising inequality and social tensions

With jobs lost and economies suffering on one hand and asset prices soaring on the other, economic inequalities around the world will worsen. Developed economies might come out stronger and emerging economies could weaken further. This could lead to geo-political and social tensions and push up demand for gold which has no country specific risks.

To summarize, a high degree of uncertainty surrounds our outlook in the short term with developments like a vaccine, a second wave of infections influencing gold. But lingering macroeconomic factors as laid out above are going to ensure that gold will remain a preferred monetary asset for years to come.

Make a strategic allocation to gold because it's the counterweight to paper money which is continuing to lose credibility as a store of value.

Source: Bloomberg, World Gold Council

Product Labeling

Name of the Scheme & Primary BenchmarkThis product is suitable for investors who are seeking*Risk-o-meter of Scheme
Quantum Gold Savings Fund

An Open Ended Fund of Fund Scheme Investing in Quantum Gold Fund
• Long term returns

•Investments in units of Quantum Gold Fund - Exchange Traded Fund whose underlying investments are in physical gold.
Quantum Gold Savings Fund
Investors understand that their principal will be at Moderately High Risk

* Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

View All

  • World Health Day: Build a Healthier Portfolio with Quantum ESG Best-in Class Strategy Fund
    World Health Day: Build a Healthier Portfolio with Quantum ESG Best-in Class Strategy Fund

    Posted On Friday, Apr 05, 2024

    As we celebrate World Health Day on April 7th, it's a timely reminder of the importance of wellness in all spheres of our lives.

    Read More
  • Debt Monthly View for March 2024
    Debt Monthly View for March 2024

    Posted On Friday, Apr 05, 2024

    Indian bond yields were range bound for most of March. 

    Read More
  • Equity Monthly View for March 2024
    Equity Monthly View for March 2024

    Posted On Friday, Apr 05, 2024

    S&P BSE Sensex grew by 1.59% in the month of March 2024. S&P BSE Midcap Index increased by 0.01% & S&P BSE Small cap Index declined by -4.8% respectively.

    Read More

Add To Cart

Add To Cart

Your cart is empty
Total of Lumpsum

Get In Touch

Take small steps in your financial planning to achieve big dreams! Start your investment journey today!

@@tlcomstart@@ @@tlcomend@@