GOLD PRICES have come under pressure alongside world share markets as the coronavirus crisis drives investors to sell assets and raise cash, while the Reserve Bank of Australia has announced an emergency package to support the economy.
The simultaneous selling of shares and bullion has highlighted how gold can behave during periods of extreme financial stress. Even assets typically regarded as defensive can face selling when investors urgently need funds.
In an update released yesterday, the World Gold Council attributed recent gold volatility largely to widespread asset liquidation, potentially amplified by leveraged positions and automated trading strategies.
The Council said investors may have sold gold to cover losses elsewhere. Falling prices can also force traders using borrowed funds to provide additional collateral or close their positions, adding to selling pressure.
Nevertheless, global gold-backed exchange-traded funds remained positive for the year. As of 18 March, net inflows stood at approximately US$11.5 billion, including US$3.6 billion during March, despite withdrawals from some funds in recent days.
The Council warned that weaker economic activity could reduce consumer demand for gold, while identifying uncertainty and low real interest rates as potential support for investment demand.
In Australia, the Reserve Bank yesterday reduced its cash rate target to 0.25%, following its earlier reduction to 0.50% on 3 March.
The emergency measures also included a target of around 0.25% for the yield on three-year Australian Government bonds. The Bank said it would purchase government bonds in the secondary market to help achieve that target.
A new three-year funding facility will provide at least A$90 billion to authorised deposit-taking institutions at a fixed interest rate of 0.25%. Additional funding will be available to lenders that expand business lending, with particular support for small and medium-sized businesses.
The RBA said the package was intended to lower funding costs and keep credit available as the virus disrupted households and businesses.
For the gold market, the immediate scramble for cash and the broader economic outlook are creating competing pressures. The latest selling shows that demand for liquidity can temporarily outweigh bullion’s appeal during a crisis.
Disclaimer
This publication is for educational purposes only and does not constitute financial advice. It does not take into account any person’s investment objectives, financial situation or needs. Before making an investment decision, consider whether the information is appropriate to your circumstances and seek advice from a licensed financial adviser where necessary. Past performance is not a reliable indicator of future performance.