Emergency Rate Cut Pushes Gold Prices Higher

After getting caught up in last week’s punishing virus-driven sell-off, gold is seeking to refresh its haven credentials. The metal advanced after a weekend of negative developments, including a surge in virus cases around the world. With rising expectations that central banks will now act, Friday’s big slump in gold was put down to investors’ forced selling to cover losses elsewhere.

Bullion is always considered the safest mode of investment during crisis. Given that, investors tend to sell gold, as prices rise, during extreme turmoil, in order to cover-up losses incurred elsewhere. Similar pattern was seen last week where gold was sold off heavily, a situation that was last seen significantly during the 2008 financial crisis.

Gold prices plunged over 4.5% on Friday, with precious metals joining a broader market selloff as investors liquidated positions to meet margin calls in other assets.

Investors were cashing out to cover losses and meet margin calls in other markets. This does not mean that investor attitude towards gold has changed or that investors have started losing faith in the yellow metal. Gold is still perceived as a safe haven asset and shall continue to do so.

And we did not have to wait too long to prove it. After witnessing a drop in prices on Friday, gold bounced back on Monday, as it rose 1 percent.

Even equities had rallied initially  as the Bank of Japan followed the US Federal Reserve in vowing to take action to stem the impact of the novel coronavirus, with Tokyo launching a new raft of bond purchases and continuing to buy stock-market ETF funds.

Bank of Japan Gov. Haruhiko Kuroda said the central bank would take steps to steady markets, and bolster liquidity through short-term lending operations and asset purchases. On Friday, Federal Reserve Chairman Jerome Powell issued a rare, unscheduled statement, emphasizing the central bank’s intention to act appropriately to address the risks posed by the coronavirus.

A second death from the virus in the U.S., has raised fears of a wider spread of the disease domestically and investors are starting to believe that the Fed and other central banks will act to tamp down expected economic shocks from COVID-19, the infectious disease that originated in Wuhan, China late last year and has rapidly spread across the globe.

The global death toll from the illness stands at more than 3,000, and deaths in China stand at 2,900, according to recent reports.

The coronavirus outbreak continued to take its toll on activity as China reported more than 78,800 infections with almost 2,800 deaths so far. Concerns about the global economy mounted as the virus spread in other countries.

 Gold rose more than 1% on Monday, rebounding from a steep decline across precious metals, amid investor hopes the U.S. Federal Reserve will cut interest rates to cushion the impact of the fast-spreading coronavirus.

Expectations for a Fed interest rate cut at the March 18 meeting are rising “and gold’s appeal as a safe haven is still strong” as the likelihood of “further coronavirus problems and upcoming political headlines in the U.S., Israel, South America, Greece, euro zone and Middle East worries are still intact.”

Fed Chair Jerome Powell said that while the U.S. economy remained strong, the coronavirus “posed an evolving risk” and the central bank stood ready to take action if needed.

Following Fed chairman Jerome Powell's statement that the US central bank will "act as appropriate" as the virus poses "evolving risks" to the economy, markets were expecting a certain rate cut when the policy committee would meet on March 17-18

But what happened on Tuesday took the markets by a sudden shock.

Gold prices rose on Tuesday after the Federal Reserve announced an emergency rate cut Tuesday of half a percentage point in response to the growing economic threat from the novel coronavirus.

Spot gold was up 3.3% at $1,643.85 an ounce, having gained more than 1% in the previous session. U.S. gold futures firmed 3.1% to $1,644.10.

The move was the first such cut since the financial crisis. It comes amid a volatile patch on Wall Street and amid a steady stream of pressure from President Donald Trump, who has called for lower rates to stay competitive with policy at other global central banks.

Expectations of rate cuts by the Fed and negative yields in the euro zone, Switzerland and Japan have supported gold prices. Not from a safe haven point of view, but because at least gold does not charge a penalty (which negative-yielding currencies do). So, gold rallied with stocks because at the time it was a risk-on investment.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.

Growing Number Of People Buying Gold

Gold is trading near a seven-year high, supported by an increasing number of coronavirus cases worldwide that threaten to curtail global economic activity. Gold has been rallying not only due to the virus but also due to the overall global economic growth.

Coronavirus- gold has been rising amid continuing worries over the Wuhan coronavirus. The price of gold bounced back from the weekly low ($1625) as COVID-19 showed no signs of slowing down, and fears surrounding the coronavirus kept the precious metal afloat as the outbreak dampened the outlook for global growth.

Gold edged higher on February 26 after a sharp drop in the previous session, as investors sought safe haven assets following a warning from the United States over the potential domestic spread of the coronavirus.

Global economy- After surging 18% last year, gold has extended its rally in 2020, with prices hitting the highest since 2013. The haven has been favoured as the virus outbreak has spread beyond China, threatening a pandemic and slower growth.

Perhaps, the worst case scenario to the global economy could start to materialize and that is keeping gold prices bid because everyone is concerned that the virus is leading to low yields.

The weakening outlook for global growth is likely to put pressure on major central banks to provide monetary support, and the low interest rate environment may heighten the appeal of gold as authorities like the European Central Bank (ECB) rely on non-standard measures to support Euro area.

It remains to be seen if the ECB will venture into uncharted territory as the Governing Council remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.

Federal Reserve- the Federal Reserve is expected to enact more “insurance” rate cuts as it looks like the U.S. economy has been impacted by the coronavirus. The virus could have a more significant impact than the trade issues had on the economy last year.

Friday preliminary PMI data showed that sentiment in the U.S. service sector contracted for the first time in more than six years.

The market is finding it difficult to look further into the medium term due to uncertainty regarding what the virus will do to the global growth. There are beliefs that central banks may cut rates sooner than later. Lower interest rates reduce the opportunity cost of holding non-yielding bullion resulting in a push in gold prices.

Gold has marked the longest winning streak since June, with the price for bullion trading at its highest level since 2013, and the precious metal may continue to exhibit a bullish behaviour as market participants look for an alternative to fiat currencies.

Besides the safe-haven demand, a growing number of people are buying gold in anticipation of weaker growth from the spread of coronavirus and action from the Fed.

So far, economists have only snipped their expectations for the economic impact on the United States and the profits of American companies. But the sharp tumble in stocks — and more importantly bond yields — on Monday suggests investors are quickly moving beyond those relatively rosy views.

Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.