Gold: Tossed And Torn By The Virus

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Carsten Menke, Head of Next Generation Research, (Julius Baer) As investors are still struggling to properly price the impact of the coronavirus, volatility in financial markets remains elevated. Risk-on sentiment returned to the markets yesterday, putting pressure on gold. Barring a longer-lasting impact on Chinese growth, we do not expect much more fundamental short-term support from the virus for gold. However, on a longer-term horizon we still see upside and maintain a Constructive view.

Investors in financial markets are still struggling to properly price the potential economic impact of the coronavirus, which results in elevated volatility. Days of risk-off sentiment are followed by days of risk-on sentiment, such as yesterday, when equities regained lost ground while safe havens suffered. Gold was down around 1.5% to just above USD 1,550 per ounce, its lowest level since financial markets started to get concerned about the virus.

From our point of view, this price pressure is primarily pointing towards a shift in sentiment among short-term traders in the gold futures market but it does indicate broad-based selling in the physical market. Holdings of physically backed gold products, our preferred gauge of safe-haven demand, still exhibited inflows over the past few days. However, as already highlighted last week, these inflows are not signalling a massive flight into safety and they are not strong enough to push prices higher. In terms of economic implications, China will see a previously unforeseen dent but its duration and intensity remain largely guesswork.

This week should provide more clarity on the epidemic’s severity as two weeks have passed since the outbreak spread. Barring a longer-lasting impact on Chinese growth, which would go beyond the first quarter and which would have a negative knock-on effect on global growth, we do not expect much more fundamental support for gold from the spreading of the virus. However, looking beyond the short term, we still see upside for gold and thus maintain a Constructive view.