March 18, 2020

Gold Prices & Stock Markets – Reason’s Behind Fall & Rise During Corona Times

General Money   || Personal Finance   || Stock Markets  ||  Real Estate ||

Yes, as we have noticed off late there has been a wide sell off in global equity markets & to a pleasant surprise there has been a sharp fall to about 10-15% fall in the gold prices during this week(as on 17/March/2020). Why does this come as surprise – gold is always considered as a safe asset during uncertain times, so as a result of this – prices of gold are inversely proportional to stock markets i.e. if stock markets rise higher, gold prices drop lower & vice versa if stock markets drop lower, gold prices swing higher, so it comes as a surprise when both of stocks & gold prices crash.

As a preliminary assessment of the fall i could say – the attribution to fall could be due to variety of reasons. Equity markets as highlighted above is in a unpunctuated fall due to panic selling due to investor’s decreasing confidence in businesses. While gold on the other hand, which rose to a new heights also saw some bit of selling during this week, due to caution selling by investors who prefer to stay in cash expecting uncertain times ahead. Ok, now let me give you a deeper understanding of how gold prices are factored.

As you may all know price of gold is denominated in US Dollar. So all countries assess gold prices in their own countries based on strength of their home currency against US dollar. If i were to take India as an example, we have seen about 5% increase in rupee against a US Dollar & its trading around 74 rs (as on 17/March/2020). So during such instances gold prices will factor in sharp fall in gold prices internationally as well as depreciating value of rupee against the US dollar. Also to the fact that, just like in other countries Gold is traded as a commodity on commodity markets like MCX. So traded value of gold is also determined by value of trades placed by buyers & sellers in the market.

Well, Why is US Dollar appreciating is certainly another subject by itself for discussion, for now we can just understand that the appreciation can be due to liquidity factors. Liquidity crunch in currency arises most often when most section of the traders prefer to stay in cash during uncertain times & this makes way for lesser currency in circulation. Well there are many measures central banks of governments can take to deal with this like printing more currencies & host of others.

Now coming to judgement call about markets – this current Market downward trend is beyond technicals & fundamentals! As as long as Chinese manufacturing resumes – its like a devil out of the box. Manufacturing segments all across the world is terribly affected. At least 60-80% of manufacturing segments around the world are either directly or indirectly working on Chinese machinery – no spares, no maintenance – so eventually no manufacturing output across industries! To top it all – as an Icing on the death cake – Brent crude oil market is hitting lower by the day. As you may know – Crude Oil acts like a derivative across all world market dealings, when that goes down, it calls for major changes in world trade dynamics!!

So for now, we all could live in hopes if Israel comes up with Corona emergency vaccines in the next few weeks, that may give some hints of a turn around. If businesses picks up & resumes business as usual (BAU), stock markets will eventually recover.

 

–    Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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General Money   || Personal Finance   || Stock Markets  ||  Real Estate ||

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