Gold prices have rallied about 7% year to date. Gold was seen trading near $1,670 an ounce, on Monday 24th February; its highest level since early 2013, boosted in part by a flight to safety stemming from the spreading coronavirus.
Gold soared as much as 2.8% on Monday to its highest level in seven years, as investors worried about global economic growth in the face of sharply rising coronavirus cases outside China.
Spot gold was up 1.9% at $1,674.40 per ounce during Monday’s trading session. The session high, $1,688.66, was its highest since January 2013.
The rise in gold was close to three times the gains in the S&P 500 before the selloff on Monday, Feb. 24 — while bond yields are at or near historic lows in the U.S. and in negative territory in many other developed economies.
Rising concerns and fears over the virus have spooked the markets. And the fear is not only over the rising medical emergency but also the result that it will have on various economies.
Outside mainland China, the outbreak has spread to about 29 countries and territories, with a death toll of about two dozen, according to a Reuters tally. However, the rate of infection in China has eased.
The World Health Organization said it was worried about the growing number of cases without any clear link to China.
The missed work days in China may be equal to the entire U.S. work force taking a two-month unplanned break. The sheer size of this disruption is starting to be felt not only in China but also elsewhere, raising the risk of further short to medium-term pressure on growth-dependent commodities before demand eventually returns to boost prices.
There was a sharp rise in coronavirus cases reported in Italy, South Korea and Iran, with Afghanistan and Iraq reporting their first cases.
Investors view gold and other assets like government bonds and the U.S. dollar as safe havens during times of stress.
Investors’ fears over the virus outbreak triggered a wide sell-off in equity markets. In Europe, markets had their biggest daily declines since mid-2016.
Concerns about the human and economic cost of the coronavirus continue to drive the need for strategic diversification and safe haven demand.
Gold is “a great hedge against market shocks and rising inflation” and is also a “great diversifier” in portfolios.
The yellow metal is a “great asset to add to more conservative portfolios and should ideally take an equal but small pro-rata share from equity and bond allocations in those portfolios to end up with a 3% to 5% allocation to gold.
Gold is a “safe” investment with a “store of value” during tumultuous times like today, buffeted by geopolitical risks from Afghanistan, Iran, Iraq, Syria, North Korea and the U.K. (Brexit), uncertainty about the upcoming U.S. presidential election and, more recently, the spreading coronavirus.
At the same time gold is supported by strong demand for jewellery and central bank reserves, especially from emerging markets.
The news from Italy has taken coronavirus fears to the next worrying level of a global pandemic, potentially triggering significant stock market sell-offs, sending Gold above $1,800, and perhaps pushing the Federal Reserve to a rate cut in March.
We believe that the combination of additional rate cuts, increased stimulus, and negative US real yields – which reached a 7-year low at -0.15% - and increased worries about company earnings going forward, will continue to drive strategic diversification and safe haven demand.
Adding to this is the clear risk that the virus outbreak may have a longer and more profound impact.
Gold could be on the verge of a long-term super cycle if interest rates remain at historically low levels in the U.S. and around the world and the yellow metal breaks above the $1,888 high reached in 2011.
Prithviraj Kothari is the author of this article. Find more information about Prithviraj Kothari.
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