What’s driving gold prices down in a time of crises?

Gold is normally considered a safe haven that thrives on crises. However, it clocked a loss of 8.6% during the last week alone, the highest magnitude of fall in the past three decades.

Source: Tele quote; Ventura Securities Ltd

A variety of factors came together to drive the price of gold down with such a vengeance. We take a quick look at each of these and how they can be expected to pan out. Then we offer a technical outlook for the near future.

 Funds moved to safer financial instruments

An impending economic slowdown or recession usually witnesses investors shifting their funds away from equity, toward fixed income. US Treasury bonds are one of the most popular choices, as investors face no credit risk with this instrument.

Now it’s true that traditionally, gold was considered a safe haven but recent history suggests that during recession times gold and equity markets share a correlation. So, for instance, during 2008 and 2018-20 this correlation played out as is visible in the images below. Moving forward, we expect a similar trend to unfold this year.

Correlation between equity and gold prices in 2008…

Source: Tele quote; Ventura Securities Ltd.

 

Correlation between equity and gold prices in 2020…

Source: Tele quote; Ventura Securities Ltd

Margin Short falls due to equity crashes

With the stock market nose-diving around the world, it is quite likely that many investors have sold gold to cover positions, pay for losses and generally de-risk their portfolios.

Lower Consumer demand in India & China

China and India are the two largest consumers of gold in the world. Due to higher gold prices over the past few months, the consumption demand for gold dropped in India and China.

Dollar index strengthened

Over past few weeks, the dollar index has strengthened. This has directly impacted the yellow metal, driving down its price. Any further increase in the dollar index may put further downward pressure on gold prices in the coming days.

Source: Ticker plant; Ventura Securities Ltd

Gold to silver ratio hits a high

With Comex Silver hitting an 11-year low, the Gold to Silver ratio has climbed to a multi-year high. This ratio suggests how many ounces of silver can be bought with one ounce of gold. It reflects the relative strength of the two metals. A rising or higher ratio indicates that gold is outperforming and a lower or falling ratio implies that silver prices are outperforming gold. With the Gold-Silver ratio at this high, we can expect a trend reversal. However, if the ratio increases from here on, then the pattern will not sustain and gold may outperform.

Technical outlook

Source: Ticker plant; Ventura Securities Ltd

Technically, MCX Gold has formed a negative divergence or key reversal pattern on the daily chart. Yesterday, it has broken the key trend line support. Accordingly, we expect the price to drag down towards 37100 to 36000 levels in the coming days, after which it will take strong support at 34000 levels. The RSI indicators also suggest a ‘sell’ signal in gold. Going forward, we expect a correction in the gold price over the next three to six months.

 

 

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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

 

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