Gold Price May Ride The Tailwind Of Virus Uncertainty, Soft US Dollar

Spot gold price chart

Source: IG Charts

GOLD FUNDAMENTAL OUTLOOK: BULLISH

  • Gold price may rise as global virus uncertainty boosts demand for safety.
  • US Dollar weakness amid accommodative central bank policy could provide support.
  • Downside risk lies with weaker demand from China and India as consumers may hold back spending.

GOLD PRICE MACRO OUTLOOK:

Gold prices have recently broken out above a key level at $1,750 and have edged higher. Global growth uncertainties resulting from the coronavirus and concerns over the economic recovery are inhibiting risk appetite and boosting demand for safety.

As the likelihood of a pause in opening-up rises alongside COVID-19 cases around the globe, investors may look at precious metals as a defensive choice compared to stocks and bonds. The recent rally in gold prices and selloff in the Wall Street is reflecting a swing down of risk sentiment.

The gold price has exhibited correlations with mining companies (positive), central bank money supply (positive), underlying demand (positive), inflation (negative), the US Dollar Index (negative), and the broad stock market (negative). A summary of the observed correlation is summarized in the table below.

Surging money supply from the Fed and other central banks around the world suggests more liquidity is injected into the financial system, and thus would buoy gold prices. A softening US Dollar in recent weeks has further propelled commodity prices, including crude oil and precious metals.

Gold prices

Source: Bloomberg, DailyFX

GOLD DEMAND OUTLOOK:

Physical demand for gold, however, is a bit tricky. A slowdown in the global economy as a result of the COVID-19 pandemic may quench investors’ demand for jewelry, watches, and investment in physical gold.

In Asia, the slowdown of China’s economy, which remains world’s largest purchaser of the metal for jewelry and investment purposes, may hurt consumers’ gold spending this year. Last year, China’s demand for gold has already fallen by 14% YoY due to trade war and macro headwinds. The overall annual consumption of gold this year is expected to remain below 2018’s peak.

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