Gold prices are fighting to stay afloat after a major cash injection in China. 1.2 trillion yuan ($171 billion) was pumped into the Chinese economy this morning, in hopes of providing investors with some much needed liquidity amidst the coronavirus outbreak. According to the most recent data out of Beijing, 17,306 are now infected in mainland China.
Over the last week-and-a-half, gold has risen as the coronavirus spread. It’s been observed that uncertainty often yields higher gold prices. The outbreak, which surpassed SARS in terms of number of infected last Wednesday, has provided that in spades.
But it might not be enough to push gold to new heights in the coming days.
“Uncertainty is generally supportive for gold but we have also seen China taking measures to support the economy. This is something financial markets are taking positively,” said Julius Baer analyst Carsten Menke, who also hinted that a strengthening dollar could be keeping gold down.
Other analysts, like AxiCorp’s Steven Innes, believe it’s only a matter of time before investors come to terms with the situation in China, forcing central banks to act.
“Once we get through this ‘band-aid effect’, the reality will set in that there is an economic tumult about to happen in China, which is going to spread globally and force a lot of central banks to cut rates,” he said.
And if rates are slashed, gold should rise. Plenty of Wall Street firms got rich in 2019 when precious metals soared alongside stocks. Retail investors who “double dipped” on the rate cuts were rewarded handsomely, too, as lower interest rates reduced the opportunity cost of holding gold.
Thus far in 2020, gold is up 4%. The precious metal hit its highest level since April 2013 after Iranian warlord Qasem Soleimani was assassinated via American airstrike.
And though the market is rebounding this morning, gold could still burst to a new yearly high according to Carlo Alberto De Casa, chief analyst at ActivTrades.
“The correction so far is moderate and prices are still above the first support level of $1,570, ready for another rebound at the very first correction of stock markets,” he said.
“Technically, the first resistance level is now placed at $1,585 — a return above this level could open the door for a rally above $1,600.”
BullionRock’s Managing Director Robin Newbould was quick to point out that continued economic fears, not the coronavirus alone, sent gold higher. If the outbreak worsens, it would simply be another “log” on the “slowdown fire.”
“In 2019, pre-virus, gold gained circa 20% thanks to low global economic forecasts, low-to-negative interest rates, expectations of a weaker U.S. dollar, trade wars and possible real wars. All pretty miserable stuff, now we think about it, but no barrier to generating positive, non-correlated returns that hold their own when compared to other assets,” Newbould said.
“Little wonder then that central banks purchased a record $15.7bn of gold in the first six months of last year.”
And whether or not the coronavirus outbreak is contained in the next few weeks, one thing is clear:
If sentiment keeps shifting bearish, 2019’s gold rally could get a rapid February “reboot” as investors exit the market.
Regardless of how far the SARS-like virus spreads.
