Gold prices slumped below the $1,500 mark for the first time this year as even safe-haven assets came under pressure amid the global market sell-off.
Gold’s decline is surprising in that, as a safe-haven asset, it typically rises during times of financial market stress – and when global interest rates are declining – as investors look to protect their wealth from near-term erosion.
However, with global stocks continuing with their downward journey, and ser to hit the lowest levels in years, investors could be opting to sell liquid or profitable assets such as gold in order to meet margin requirements on losses in other markets.
Equities around the world plunged even as global central bank made a coordinated efforts at pump-priming the economy.
The Fed slashed its benchmark lending rate by a full 1% Sunday to a range of 0% to 0.25%, matching the record low last seen during the peak of the global financial crisis in 2008.
The Fed Funds rate now sits in a range of between 0% and 0.25% after the surprise 100 basis point cut, which comes just two days before the Fed’s scheduled two-day policy meeting on March 17.
Central banks around the world joined the Federal Reserve in injecting cash into stressed markets and seeking to calm panicked companies and investors.
Bank of Japan ramping up its asset purchase program, the Reserve Bank of Australia providing further liquidity injections and the Bank of New Zealand cutting its benchmark rate by 75 basis points to 0.25%.
The US dollar rose as investors scrambled to get their hands on cash in what some are calling an irrational “fear trade”. If the stress in the dollar funding market continues, it could lend further support for higher prices. A stronger dollar has historically been negative for the price of gold.
Talking about the impact of gold price decline on companies, we will have to stick to financiers, Muthoot Finance and Manappuram Finance. The downward trend in gold price doesn’t augur well for these companies.
Lower gold prices directly import the loan book value as the companies can not give more amount as loans to borrowers (higher loan to value ratio), even though growth in the number of loan accounts lags.
Manappuram has about a 66% share of gold loans in total AUM, it is over 98% in case of Muthoot. This indicates the potential impact in the balance sheet size of gold financiers.
Gold price has direct influence on the balance sheet expansion.
Meanwhile, Investors continue to pile into gold as fears of the coronavirus intensify. Holdings in gold-backed ETFs already total more than half of the 323.4 tons added in 2019.
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