When US pharmaceutical major Pfizer announced a Covid vaccine with 90 percent effectiveness, gold markets across the world crashed by nearly 4-5 percent.
Finally, we are inching closer to the reality of a vaccine. And that may have some bearing on Gold, the yellow metal we all love so much.
Should investors who have held ETF portfolio or scores of those investing in physical gold be worried? Not really, to be honest.
There are more than 200 vaccines in development globally. Half a dozen of those are in phase 3 human clinical trials and the analyst community was expecting a viable vaccine by the end of the year. There was also an expectation that markets would behave in a knee jerk fashion once a 100 percent effective Covid vaccine hit the markets.
Indeed, the risk sentiment has been renewed after the Pfizer announcement, but it does not seem to have dented prices the way it should have.
Stock markets celebrated the news. But the global rally sparked by the announcement lost steam later in the day, with stocks closing only marginally higher despite larger gains earlier as investors rationalized and digested the news with cautious optimism.
Experts are waiting to see more data and pointed out that questions about efficacy, regulatory approval, timing, costs and distribution of the vaccine need to be answered. Pfizer’s vaccine still needs to be submitted for FDA approval and seems difficult to implement. It requires two doses and ultra cold storage temperatures which could push up the cost of the vaccine and potentially limit mass distribution.
Yes, Pfizer’s announcement is positive and encouraging but on a realistic basis it is still time for the vaccine to arrive at local pharmacies for the general public.
Keeping aside the specifics of this news, we believe that a vaccine’s impact on gold prices is overestimated. Remember, gold prospects had turned brighter with a u-turn in monetary policies of the Federal Reserve in 2019 as the economy was fast losing steam, even before Covid-19 struck. The pandemic was a tail wind for gold but fundamentally that doesn't alter the prospects dramatically. Here’s why.
1. Vaccine efficacy and timelines are concerns
Governments around the world are expediting the usual approval processes in order to deliver a Covid-19 vaccine quickly. In fact, Russia has rolled out a vaccine already, but there is skepticism about its safety and efficacy, considering the ramped-up timeline. To put things into perspective, the fastest a vaccine has ever been made is 5 years and this one’s here merely months into the pandemic. Even if one was to ignore that, large scale manufacturing and a public launch is months away, may be mid 2021 which has always been the base case. Thus, stock market optimism on Russia’s announcement as well as Pfizer’s was short-lived.
2. Expecting a full and immediate restoration of economic activity is naive
There is no doubt that a successful vaccine’s impact on the health effects of the pandemic will be positive, as and when a large-scale roll-out is achieved. But it can't undo the extraordinary economic damage caused over the last few months overnight. In fact, with a resurgence in cases in the United States and Europe, a complete reversal of the Great Lockdown has been further delayed, slowing the economic recovery. Thus, even though the announcement of a vaccine may lead to a temporary correction in gold prices, and drive up risk sentiment, ground economic realities will take time to fix. Till then normalcy and certainty will evade us and investors will prefer the stability of gold.
3. Weak economy needs Government support
The economic damage has been severe and therefore it will take longer for the economic recovery. The World Bank estimates that a full recovery will take 5 years. It took almost 7 years to recover the jobs from the last unemployment peak in the U.S, this crisis has seen almost triple the size of job losses. This helps reconcile what the World Bank says, it will take longer and will need some heavy lifting from the government. To support the beleaguered economies, governments will have to resort to more stimulus measures over next 2-3 years, more spending which will result in more deficits and rising debt. Gold should continue to benefit from this spendthrift policy making.
4. Low yields will continue to limit bonds’ utility
Investors can expect sustained accommodative policies to get the battered economy back on its feet over the next few years. Central banks continued to remain accommodative for six years following the Global financial crisis of 2008 and this is many times more severe than that. Thus, bond yields and short-term interest rates are bound to stay low in nominal terms and negative in real terms for the foreseeable future. The Federal Reserve has announced that it will be keeping rates near zero till 2023.Such low yields will limit bond markets’ ability to act as a hedge against equity price volatility and at the same time minimise the opportunity cost of holding zero-yielding gold. This will be bullish for the yellow metal.
5. Weaker dollar and inflation on the horizon
Even with a Republican-led Senate, Biden will get a stimulus bill, though smaller, passed early next year. Unlike the Global financial crisis where new money creation went to banks and financial institutions, this time the massive monetary policy easing and never seen before government relief packages seems to be trickling fast to the real economy. The monetary inflation is resulting in a weaker dollar. A weaker dollar and high liquidity could result in higher commodity prices as well and therefore could be inflationary. The Federal Reserve has announced that it will adopt an average inflation target going forward that will allow inflation to run above 2%, to support the pandemic-struck economy. Gold, known for preserving purchasing power, will become a preferred asset in such times.
This means the reaction in gold prices at the start of the week is only temporary and the outlook for gold remains positive. So buy the dips and accumulate gold, and benefit from the long term prospects of gold which acts as a counterweight to fiat money which is increasingly losing credibility.
Disclaimer: The inputs within this story are purely for information purposes and should not act as a replacement for personalized financial advice from a certified analyst. Views expressed are completely personal to the author and should not be considered as solicitation for investment. Chirag Mehta is Sr. Fund Manager-Alternative Investments Quantum Mutual Funds. The article has been edited by a Sify editorial staff. The image within the article is a file photo from Sify Archives.