Gold prices continue to ratchet upward as investors seek a safe haven amid concerns that the coronavirus outbreak might lead to a long-term negative impact on the global economy. However, many analysts can point to several other factors that keep them bullish on gold.

Last December, Goldman Sachs raised its target price for gold to $1,600 per ounce in 2020. “We still see upside in gold as late cycle concerns and heightened political uncertainty will likely support investment demand for gold as a defensive asset,” it said in a report.

Gold’s 18.4 percent rise last year was its strongest performance since 2010, according to the World Gold Council.

LOW INTEREST REGIME

Last week, in its first Federal Open Market Committee meeting of the year, the US Federal Reserve decided to leave interest rates unchanged. The move puts pressure on dollar and bond yields while increasing the appeal of non-yielding assets like gold.

“The Federal Reserve has been pretty clear with regard to future US interest rates [that] there are no expected hikes at this moment for this year; this factor should be supportive of gold prices,” Gaurav Kashyap, Head of Futures at Dubai-based EGM Futures, told Zawya.

According to Gerhard Schubert, founder of Schubert Commodities Consultancy in Dubai, the low interest rates are adding to the rise in gold prices. “More important is the zero or even negative interest rate environment as well as the globally visible trend to more populistic and nationalistic policies,” he told Zawya.

He is also convinced that gold will test and settle above $1,600 during 2020. “Gold has recently made new all-time highs against all non-dollar pegged currencies and the negative interest rate environment in many countries, supporting gold’s role in the global markets.”

“I am looking positively at gold as an asset diversification tool. I would recommend increasing the percentage of gold holding in a prudently managed portfolio from the current 8–10 percent to a maximum of 12–15 percent,” Schubert added.

Kashyap said it may be too risky to be bearish on gold in the current climate. Geopolitical factors as well as the volatility expected in equity markets in the lead up to the 2020 US presidential election should keep gold bulls interested.

“All things considered, I will be buying gold, but during dips in the current environment. I would wait for $1,490 per ounce levels before triggering new positions. Beyond that, I see support coming in at $1,391 levels at the second level of extension. I don’t see a break below $1,391 levels in 2020,” he added.

The recent weakness in the US dollar against other foreign currencies has also helped prop up gold, which is typically priced in dollars, as it becomes more attractive for buyers.

Kashyap said that it was crucial to keep a watch on the performance of the US dollar and US equity markets as there is a clear inversion between US equity performance and gold. “While I don’t see a strong correlation between the coronavirus and gold, the virus has weighed down equity markets and is propelling gold prices in the interim. This trend should continue in the upcoming months.”

CENTRAL BANKS ON BUYING SPREE

The gold-buying spree by central banks worldwide, which supported the commodity in 2019, is expected to continue. Net gold purchases by central banks will likely remain robust even if they are lower than the record highs seen in recent quarters, according to the World Gold Council’s latest report.

It also noted that central banks were net buyers for the tenth consecutive year in 2019, adding 650 tonnes to the global reserves; the second highest annual total for 50 years. Analysts at Goldman Sachs expect central bank gold purchases to hit the 650-tonnesmark again this year.

Banks, like other investors, are accumulating the precious metal as a safe-haven asset in times of geopolitical instability and as a hedge against low yields in the bond markets. The precious metal outperformed bonds and the MSCI EM Index.

However, analysts are not unanimously bullish.  Stephen Innes, Chief Markets Strategist at AxiTrader, warns that the current risk-off sentiment may not support gold for long.

“Gold has clearly benefited from the turmoil emanating from the coronavirus and the Iran conflict earlier in the month. However, if both tails fade, gold positioning could be a bit of a problem. And with physical demand remaining weak, traders will need to be extremely alert to plateaus in virus headcount or mortality rates on a daily basis,” he said

(Reporting by Brinda Darasha, edited by Seban Scaria)

(seban.scaria@refinitiv.com)

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