|05 March, 2020

Gold set to shine through coronavirus chaos

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency and commodity markets. Lukman holds a BSc (hons) degree in Economics from the University of Essex, UK and an MSc in Finance from London School of Business and Finance, where he studied corporate finance, mergers & acquisitions and the role of international financial institutions.

Website: www.forextime.com

The coronavirus outbreak represents a significant threat to the global economy with the human and economic costs difficult to quantify

A growing sense of unease and trepidation over how badly the coronavirus outbreak will hit the global economy should heavily influence Gold prices over the next few weeks.

The coronavirus outbreak represents a significant threat to the global economy with the human and economic costs difficult to quantify. With each passing day the numbers of new reported cases increase and as of writing over 90,000 have been infected and death-toll has risen beyond 3,000. This black swan has certainly left global sentiment extremely fragile and such continues to be reflected in Gold which has appreciated over 8% year-to-date despite the brutal selloff witnessed on the last trading day of February.

Concerns over slowing global growth remain rife, especially after the Organisation for Economic Co-operation and Development (OECD) downgraded its 2020 global growth forecast from 2.9% to 2.4%.  In January, the IMF forecast global growth to strengthen from 2.9% last year to 3.3% in 2020. Since then, the coronavirus outbreak, which the World Health Organisation deemed a global health emergency, will likely cut 0.1% from growth according to the institution.

It does not end here. Risks surrounding the virus outbreak were so high that the Federal Reserve enforced an emergency 50 basis point interest rate cut for the first time since October 2008. Speculation around global central banks turning the monetary policy taps wide open are set to jump following the Fed’s emergency move. Given how Gold is a zero-yielding asset, it is positioned to flourish in a low interest rate environment. The Federal Reserve is speculated to cut interest rates again at its meeting in March with further rate cuts in 2020.

However, questions are still being raised as to whether central banks have enough ammunition in their policy toolkits to counter the negative impacts of the outbreak. Let’s not forget the coronavirus is a health crisis that caused major supply-side shocks in the form of factory closures, a reduction in services and supply chain disruptions. So looser monetary policy may have minimal impact in solving the matter at hand which could result in investors rushing towards Gold amid the chaos and growing uncertainty.

The fundamentals remain in favour of Gold bulls with coronavirus concerns guiding prices towards $1700 in the medium term to longer term.

* Any opinions expressed in this article are the author’s own

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