The unprecedented bull run has created such hype about gold that even those who do not traditionally show any appetite for the yellow metal joining the frenzy. The big question that all this leads to is whether the gold rally is sustainable at the current levels.

Gold has been on a generally positive trend for the past few years. However, the onset of Covid pandemic has made gold’s relevance as a hedge even more apparent and accelerated its price performance. Gold increased by 17% during the first half of 2020, moving up by an additional 10% in July.

The latest price move has come in quick time, combined with markedly weak consumer demand, which could have a bearing on price volatility in the near term. But in view of the uncertainties caused by the pandemic, there have been structural shifts to asset allocation by investors, who see strong fundamental reasons supporting gold investment over longer term.

But for retail customers of gold jewellery, the continuous price rise has not been good news. While investors, especially in Western markets, have embraced gold as a means to hedge their portfolios, consumer demand so far this year has fallen sharply due to the negative effect of the pandemic on economic growth combined with stringent lockdown measures.

With the easing of lockdown in June, jewellery markets re-opened in most of the cities of India. But the easing also saw Covid cases rise, posing further challenge for jewellery demand. Fewer weddings and lack of auspicious days in the month further dampened demand.

Now coming back to the sustainability issue. The gold rally has been driven by a combination of factors, chief of them being the high uncertainty in view of the pandemic, very low interest rates, and positive price momentum, all of which supported investment demand.

The pandemic is far from over and, more importantly, its impact on the global economy is yet to be determined. While it is true that some countries like China, South Korea, Germany and other European nations have started to turn a corner, .early hopes of a fast recovery globally are all but gone. Instead, market participants are bracing for a bumpy ride and a longer road to recovery.

To put things into perspective, the gold price more than doubled from approximately $900 per ounce in early 2008 to its high more than three years later in the aftermath of the Global Financial Crisis. In contrast, it has increased by just under 30% since the beginning of the Covid outbreak.

According to World Gold Council, adjusted for inflation, the gold price today is less than S$200 shy of the 2011 level and well below its 21st January 1980 record high equivalent to approximately $2,800 per ounce in today’s money.

The current rally is marked by speed. It took approximately four months for gold to go from $1,650 per ounce $1,800, but just about four weeks to climb to the current levels. According to the council, while this uptick was driven in good part by a sharp depreciation of the US dollar, the magnitude of the change is highlighted by gold’s 14-day Relative Strength Index, which reached a high of 88 on 27th July. This is usually seen as a sign that the market could be overbought. That said, gold’s 3-month and 1-year rolling returns have moved by less than two standard deviations and are significantly below levels seen in previous periods of strong movements. This alternative metric suggests that the cumulative magnitude of gold’s move is not unprecedented.

Gold’s dual nature also requires stability in the cyclical portion of demand, such as jewellery or technology, to ensure a sustainable performance. This has been demonstrated in the past as well. During the Global Financial Crisis, emerging markets rebounded quickly, which helped maintain consumer demand. At the same time, elevated levels of uncertainty in developed markets, combined with expansionary monetary policies, kept gold’s performance well supported. Signs that economic activity in some countries such as China or Germany is beginning to normalise contrasting with the acceleration of Covid cases in the US is negatively impacting the US dollar. And a weaker dollar environment, combined with ballooning deficits and expansionary monetary policies, is giving investors good reason to add gold to their portfolios. (IPA Service)