Gold outshines all assets amid virus fears

Singapore

VIRUS outbreak fears and dovish central banks - chiefly the US Federal Reserve - have been the wind beneath the wings of gold's recent moonshot, with analysts now bullish about the yellow metal's chances of breaking through the US$1,700-US$1,800/oz marks.

But there is general consensus that it will take more than the virus and easy money amid a near zero interest rate environment to vault the safe-haven asset to its record high of US$1,921.41/oz reached in September 2011 - more so in the absence of inflationary pressures, for which gold is a favourite hedge.

Oanda's senior market analyst Jeffrey Halley agreed that the bullion is unlikely to hit the all-time high.

He expects prices to "top out" in the US$1,750-US$1,800 range in the first half of the year as he doesn't foresee big rate cuts by central banks, particularly those in developed countries that have already "cut to the bone".

Moreover, he said that rate cuts will not solve the problem. "If an SME cannot make payroll because they haven't been paid, or because sales have dropped, all the rate cuts in the world will make no difference," he said.

On the other hand, OCBC economist Howie Lee is surprised that given how low interest rates are, gold has not attempted to test the September 2011 record high.

"This suggests that the market still expects the economic impact from Covid-19 to be more transient, compared to the issues faced in 2011 which were more structural in nature," he explained.

Indeed, the yellow metal just closed its best week in eight years with gains of more than 5 per cent to over US$1,677/oz as fear factor heightened and risk-off mode took charge with Covid-19 spreading to the US and Europe, fanning worries of a global slowdown and triggering a rout in global stocks, including Wall Street.

A big boost for the precious metal came from the US Federal Reserve on Tuesday after it made an emergency 50 basis point interest rate cut, causing stocks and bond yields to plummet.

"With central banks falling into rate cut mode in a domino effect, gold will continue to find support on dips in a Covid-19-infected market," reckoned AxiCorp chief market strategist Stephen Innes.

He expects fear-driven demand to push gold through US$1,700/oz and has raised his 2020 target to US$1,800/oz.

Another factor favouring gold is the reemerging "anti-dollar theme", according to TD Securities.

"The Fed fired two (blank) bullets in its attempt to loosen financial conditions, which ultimately removed dry-powder for a future response, and the market is still looking for more cuts.

"This is adding pressure on the dollar as the euro continues to strengthen in response - in this lens, the anti-dollar theme is emerging as a viable near-term theme driving gold prices.

"With interest rates now closer to the zero-bound, conventional monetary policy is creeping closer to its limits... For these reasons, we think that gold - a store of value with 6,000 years of history - will appreciate significantly this year," said TD in a recent report.

According to an outlook report by the World Gold Council released last week, gold holdings hit a fresh all- time high in February as equity markets saw their worst monthly performance since the financial crisis.

WGC, the market development organisation for the gold industry, stated that gold has historically performed well in the 12- to 24-month period following policy shifts from tightening to "on-hold" or "easing", which reflects the current monetary environment.

In fact, it pointed out that historically, gold's average monthly returns have been twice as high as the long-term average when real rates were negative.

There are a few factors, however, that could quickly end gold's ascent.

One key deflator - and great news for the world - will be the emergence of a fast-acting vaccine that would trigger a "pretty steep fall" in the bullion, said Mr Innes.

Mr Halley said that if the virus is rapidly brought under control, gold prices will fall quickly amid the unwinding of emergency easings and an earnest restart in the rally in equities.

Furthermore, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, warned in a recent note: "... gold is not virus-proof. There is a large build of speculative long positions in gold, and (the week before) last week showed that the negative correlation between gold and risk assets may suddenly break when speculative longs judge it's time to realise profits."

For now, the coronavirus outbreak remains a massively daunting unknown.

"I don't think anyone has a clear idea of how big the economic impact of Covid-19 will eventually be. Due to the seemingly transient economic impact of the Covid-19, I expect gold prices to perhaps come close to its record high but not surpass that level materially," said OCBC's Mr Lee.

He added: "But given the bloodshed in the equities market at present, I can understand why gold bulls have started to call for US$2,000/oz. Perhaps an increasing part of my conviction is starting to tilt towards that inclination."