Gold falls as investors shift to safety of cash
King Dollar is creating a new headache for virusbattered economies globally, with emerging markets especially vulnerable as they try to cope with collapsing currencies and plunging demand.
Investors are fleeing emerging markets in record numbers and piling into the safe-haven greenback, with two emergency interest-rate cuts this month by the Federal Reserve doing nothing to diminish the dollar's appeal.
With the dollar more integrated into the world economy than ever before, its gains are an added stress for businesses and governments as they brace for soaring costs on their dollar debt. The dilemma for emerging market central banks is that as they slash interest rates to support growth, they risk destabilising their currencies
London, March 18: Sterling tanked on Wednesday against the dollar, hitting its lowest level since 1985 as investors snapped up the safe haven US currency in markets panicked by the coronavirus outbreak. The pound slid about 1.9 per cent to $1.1828, according to Bloomberg data. It later
as well if they cut too much.
"The surge in the dollar is another blow to emerging markets," said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. "The demand for the dollar has outweighed any hit to the US currency from sharply lower Fed rates. EM assets will continue to stood at $1.1861."Sterling has completed one of its steepest declines in memory by hitting its weakest level since 1985, excluding... the brief dive of the October 2016 flash crash," said Markets.com analyst Neil Wilson. "This seems to be an offloading of risky-ish pounds in favour of safer dollars." struggle as investors steer clear of relatively risky assets and maintain a bias for safe havens."
Turkey's central bank was the latest emerging market to make an emergency rate cut. South Korea, Chile, Vietnam, Sri Lanka and Pakistan already eased this week following the Fed's action on Sunday, and South
Africa, Indonesia and Brazil are expected to reduce their key rates in coming days.
New research from the Bank for International Settlements shows that since the global financial crisis, unexpected dollar appreciation depresses world trade growth. A reason for this could be a tightening in financial conditions as dollar lending to emerging markets slows, according to the research paper.
Outflows from emerging markets are already at record levels, reaching $30 billion in 45 days amid the virus outbreak, according to the Institute of International Finance. All major emerging-market currencies tracked by Bloomberg have weakened against the dollar since January 20—the onset of Covid-19 concerns in Asia—with the Russian ruble and Mexican peso dropping almost 20 per cent.
Gold prices have remained quite volatile in the past few sessions as US dollar gaining strength despite the US Federal Reserve bringing down the interest rate. The
Covid-19 pandemic fears are forcing investors to keep cash in hand rather than investing in assets. Though the long-term prospects of the metal are bright, volatility will continue in the short-term.
On Wednesday, gold fell as much as 2.7 per cent as investors to dump most assets for the safety of cash.
Gold has fallen from its recent highs above $1,700 per ounce to touch a recent low of $1,450. In the Indian market, gold prices have slid from around
`45,000 per 10 gm to
`39,700. The fall in the bullion market was a result of the equity market crash as the hedge funds went on to book their profits in gold to cover margin calls in equities.
“Hedge funds had to cover their losses in equities and hence they were increasingly booking profits in gold, which had gone up around 40 per cent in the past one-and-half year,” said Jateen Trivedi, senior research analyst, commodities and currencies, LKP Securities.
However, gold should have moved up after the US Federal Reserve lowered the interest rates and announced the bond buying programme. Both are factors that, in any normal scenario, would have supported another rally in gold. But, gold has remained highly volatile, moving in a wide range between $1,460 and $1,530. The average daily movement in gold has significantly moved up in March compared to what it was in February.
“The pandemic scare is making investors hold on to cash rather than investing it any asset class. This sentiment has supported US dollar,’ said Himanshu Gupta, vice president and head of commodities and currencies research, Globe Capital.
While the volatility will continue in the short term, the fundamentals are supportive of gold in the medium to long-term.
“Once the epidemic subsidies, we will start hearing about the impact of it on the global economy in the coming quarters. This will see investors flocking towards gold,” said Gupta.
Goldman Sachs has lowered the three-six month gold forecast to $1,600, but has retained the 12-month forecast at $1,800.