Gold prices hit due to massive liquidation across asset classes

PR Somasundaram of World Gold Council says while the general correlation between stocks and gold is negative, there seems to be an exception when there is disorderly selling. He says this has been seen in the past and it is a temporary phenomenon.

While gold saw an uptick in the last three months, it has been caving in ever since the COVID-19 pandemic breakout. It is traditionally being looked at as a safe haven in times of distress. Why do you think this has been happening?

It is linked to several factors. Primarily, there has been massive liquidation of virtually all asset classes, which we have experienced this past week, and gold has been no exception. Gold is more liquidity. So when people try to cover positions, leverage positions, there is also rule-based trading. They got to wind up their positions, gold comes in very
handy. That is one of the reasons. We have seen this happen even historically. The general correlation between stocks and gold is negative, it rises when stock prices tumble. However, there seems to be an exception when there is disorderly selling. We have seen this in the past. It is a temporary phenomenon.

But it is intriguing because the world over central banks are slashing interest rates. Hopefully, India should be next in line. But gold is not even reacting to that.

As I said, it is the case across asset classes. The sentiment has not quite been healthy. It is just that people are probably sitting more on cash to see which way things turn. So cash is king at such times. We have seen this happen in the past as well. This is complete disorderly selling. People often use gold to settle positions, which is what has added to this chaos and, therefore, such volatile price behaviour. On the demand side, obviously there is no support right now.

Where does gold price go from here? Where is it that you see them actually normalise?

There is going to be huge support for all currencies. There will be additional QEs, which have already been announced. We should see how they play out. This looks good for gold in the long term. If we have more currencies floating around, it will be good. But I just have to say, equities have come down so much, particularly in India, gold will certainly have a good run over the next two-three years. It is also possible that because of the low prices of many of the equities, they may also offer very attractive return over the next three years.

So gold is going to have a competition there. It is not just because gold prices are going to go up, they will be good. Gold is the best performing asset class. It will have a good run next couple of years, because of the additional QEs that are being announced. But because equities have fallen so low, they will also become very attractive when things
come to normal.

Courtesy: ECONOMICTIMES