Financial services company INTL FCStone Europe, the Middle East, Africa and Asia market analysis head Rhona O’Connell says the majority of precious metals have moved into uncertain territory, with future trends difficult to predict as Covid-19 disrupts international buying and selling markets.
She further notes that although gold has performed well as a safe haven asset, with the onset of Covid-19 into territories besides its origin of China, came an unexpected drop in its value. “It initially dropped and a lot of people questioned why this happened as it seemed counter-intuitive [to how a safe haven asset should perform in times of financial turmoil].”
However, she notes that, with most market crashes, gold does initially crash, which is then followed by a rapid gain in value. She says there are two reasons why this happens, one being philosophical and the other technical.
The philosophical element takes into account the reason why many professional portfolio managers will hold gold in a portfolio. “It enhances value adjusted risk and risk / reward ratios, and therefore quite often you will find that when faced with distressed sales and potentially margin calls, that gold will be one of the key elements with which cash can be raised.”
She adds that gold then has a tendency to be sold off in an effort to mitigate stress, followed by, typically a later-stage, buyback by the same people that sold it. “This was the case at the beginning of the international Covid-19 outbreak when gold prices dropped.”
The technical side takes into account that the vast majority of equity markets settle in about three days after the date of the transaction, whereas gold settles within two days.
“Therefore, if you have exposure to the equities market, and you believe you are going to need cash to raise against margin calls, then you will have that money in your assets 24 hours before you actually need it because gold settles that much more quickly.”
Meanwhile, post-Covid-19, gold will continue to remain highly valued, potentially even reaching $1 800/oz, says corporate investment banking company Natixis senior commodities analyst Bernard Dahdah.
He reiterates O’Connell’s sentiment that while a short-lived crash in gold is to be expected once markets become volatile, this should typically be followed by a substantial rise in its value.
It is important to note, however, that there will be a residual impact of Covid-19 in two places, one in employment figures and the other in debt overhang on corporates, he points out.
Employment will play a big role in future gold value. He explains that 22-million people have applied for initial job assistance, which is equivalent to 13% to 15% unemployment, "with a likelihood of reaching 20%.”
Dahdah states that job losses happened very quickly as Covid-19 spread uncontrollably, and that most likely, the re-employment of people will take longer through the recovery phase of the economy. “The problem that arises with this is some mortgage and car repayment defaults, and that could potentially create some headache to some of the mortgage providers and the economy.”
Unemployment, coupled with debt overhang on corporates, will see debt levels increasing and the downgrading of major companies, he says. “This will create a higher cost of funding, lower investments, lower growth and lower employment.”
“This combination of concerns from defaults from high yields with low oil prices I think is going to keep gold prices up,” states Dahdah.
In addition, he suggests that with the US Federal Reserve System having lowered interest rates, which are not going to increase “anytime soon, and which are close to zero”, coupled with low inflation and subdued oil prices will lead to gold prices reaching $1 800/oz before the end of this year.
Further, Dahdah says that while silver has been underperforming for a while, it is important to remember that 60% of world silver production goes into industrial demand. “With some operations restarting, the value of silver should improve,” he notes.
However, platinum-group metals may suffer as the automotive industry has been hit hard with factories closed or having lowered production volumes, states Dahdah, adding that aluminium is also largely exposed to the automotive sector, so “will probably be hit hard too”.
Both O’Connell and Dahdah presented as part of the Outlook for Precious Metals in a Covid-19 World webinar, presented by the London Bullion Market Association on April 23.