Gold gets support as ETFs pile up the yellow metal on mounting virus fears
2 min read . Updated: 26 Feb 2020, 12:22 AM IST
Premium- Currently, gold holdings with ETFs are at their highest level ever, while its price is much lower than its previous peak
- Apart from gold-backed ETFs, central banks have been driving demand for the precious metal in 2019 to diversify against currency risks
Gold’s status as the go-to asset class in times of financial distress has never been in doubt. The rise in coronavirus cases across the globe has led to the international price of gold ballooning to $1,660.7 an ounce in the past few days. In fact, year-to-date the yellow metal has shot up 9%—and about 25% in 2019 as financial markets reprice gold since the clouds of a slowdown have begun to loom across the globe.
Gold holdings of exchange-traded funds (ETFs) have started to increase in the last few months. Significantly, though, this may indicate that the recent surge in gold prices may not have run its course yet. Gold holdings of ETFs on 14 February zoomed to an all-time high of 2,980.6 tonnes, revealed data from the World Gold Council.
However, prices are much lower than the peaks of about $1,900 an ounce the precious metal breached in August 2011. Then, gold holdings of ETFs had zoomed to about 2,750 tonnes, much lower than the current levels. Currently, gold holdings with ETFs are at their highest level ever, (3,004.5 tonnes), while its price is much lower, at about $1,655 an ounce, than its previous peak of $1,900.
Of course, gold price dynamics depend on a host of factors, including the behaviour of the dollar. In fact, the precious metal tends to weaken when the greenback shows signs of strengthening. But the current dynamics have largely been driven by the flight to safety as investors shift allocations from riskier assets to gold.
“Gold is considered a safe-haven now due to the uncertainty surrounding the coronavirus and the latter’s spread to nations far from the centre. The growth potential of the global economy is at risk; therefore, gold becomes an excellent asset to diversify in such times, and gold investment is increasing significantly," said Chirag Mehta, senior fund manager at Quantum Asset Management Co. Pvt. Ltd.
Apart from gold-backed ETFs, central banks have been driving demand for the precious metal in 2019 to diversify against currency risks. Central banks globally have been supporting growth by increasing liquidity and cutting rates across the world.
While investors are looking at the yellow metal from a diversification perspective, as global growth returns, gold ETFs may once again wind down their positions. That could see gold prices coming off once global fears about the coronavirus and slowing economies recede.
“Once the coronavirus worries recede, gold prices may correct marginally. But it does not seem that there are huge downsides for gold as other factors such as low-interest rates and high liquidity are supporting gold," points out Mehta.
