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How has Coronavirus impacted the bullion market?

12 May 2020 - Gold News

Markets around the world are trembling and moving toward recession after the Coronavirus pandemic has forced the whole world into extended lockdowns. The situation may prove to be even worse than the 2008 financial crises if the pandemic continues.

The only thing going up during these hard times is gold, which could hit an all-time high. Here is a look into the factors behind the gold rally and other coronavirus led trends.

This March proved to be the worst for US indices for decades while stock indices across the globe followed the trend. The market witnessed a ‘circuit breaker’, a term used to define closure of all markets for 15 minutes if the market drops more than 6-7% during a single day. London’s FTSE, Germany’s DAX, and Japan’s Nikkei indices followed the S&P 500. The biggest factor behind this plunge was the oil glut.

The oil war between Russia and Saudi Arabia made sure that oil storage facilities fill up amid decreasing demand due to worldwide lockdowns and airline closures. The inability of the OPEC+ oil giants to reach an understanding of how to cut the oil supply has sent oil prices into negative pricing for May contracts.

The intergovernmental body for the oil policy-making, OPEC, or Organization of the Petroleum Exporting Countries recommended cutting the oil supply gradually until the market prices balance out. But constantly decreasing oil demand and the Russian-Saudi conflict has sent the West Texas Intermediary or WTI crude into a free fall. Oil prices have not been able to stabilize since then.

The second most important factor behind the dwindling trust in stocks is gold purchasing. Bullion proved to the ultimate haven for the wealthy once again and the price of gold may soon hit an all-time high. The panic created by the S&P 500 crash and oil prices crash pushed investors toward gold. This deepened the market crises even further as investors started ditching risky assets to invest in gold.

The central banks and the FED tried to stimulate progress by slashing interest rates by half a point. The move was made after a unanimous agreement between the finance ministers and central bankers from the UK, France, Germany, Canada, Japan, and Italy.

Reduced interest rates were aimed at stimulating the economy but the extended lockdowns and fears caused by coronavirus have resulted in the closure of factories which has affected manufacturing. Hence, the surprising move by the FED of cutting US interest rates, unfortunately, failed to produce the desired results.

All of these factors along with the fear of an uncertain future contributed to the surge in oil prices. The high levels of uncertainty and fears of economic recession instil a sense of fear in the minds of investors. When an investor is confused or uncertain, gold remains the ultimate haven.

 

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