SINGAPORE (Apr 24): The team at CGS-CIMB Research believes gold is expected to rally a bit further from here, in line with the rebound in global equities. However, another round of risk aversion could bring the price of gold down again, together with equities. 

Unless Covid-19 is contained suddenly and soon, the shutdowns — even on-and-off shutdowns — are likely to damage not just the current demand but also the future demand for gold through higher debt levels. The impact will be deflationary, which has historically worked against the price of gold. Risk aversion is also likely to return if economic shutdowns continue or resume. The sudden halt to business means severe disruption of Dollar cash flows. That will drive another round of Dollar funding stress, driving the US Dollar Index higher. Historically, that has tended to work against the price of gold. Eventually, when central banks attempt aggressively to inflate away the debts accumulated by their shareholders (i.e. governments), gold will shine again, in our view. But not while deflation and Dollar funding stress remain dominant concerns. 

The market performance of gold in the midst of the Covid-19 crisis has left its fans a little puzzled. From a peak of US$1,703/oz on March 9, gold retreated to US$1,451/oz on March 16 — a 15% decline. And of concern to asset allocators, the price of gold has tended to move in line with equities since late-Feb. When VIX peaked and turned down from March 19, gold bottomed and rallied along with the S&P 500. This raises questions about the usefulness of gold for portfolio diversification in this environment.

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