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Gold stages a fightback after slump leaves haven with black eye

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After getting caught up in last week's punishing virus-driven selloff that hit everything from equities to commodities, gold rebounded on Monday to refresh its credentials as a haven in troubled times.

[SINGAPORE] After getting caught up in last week's punishing virus-driven selloff that hit everything from equities to commodities, gold rebounded on Monday to refresh its credentials as a haven in troubled times.

The metal advanced after a weekend of very negative developments, including a surge in cases around the world and predictions for severe dislocation. With rising expectations that central banks will now act, other assets also gained on Monday including equities, copper and oil. Friday's big slump in gold was put down to investors' forced selling to cover losses elsewhere.

"Gold's fundamentals remain overwhelmingly strong and any near-term price corrections aren't significant in terms of the bigger picture," said Gavin Wendt, senior resource analyst at MineLife Pty. Besides, while bullion did retreat last week, "that was nowhere as bad as the 10 per cent-plus drubbing equity markets took, so it can be argued gold has passed its safe-haven challenge", he said.

Bullion has a long-standing reputation as a go-to asset in times of stress, offering a way to shield portfolios when markets swing away from risk. That said, there's a chance during extreme turmoil investors sell gold, something seen on Friday and, before that, for a period in the 2008 financial crisis.

Investors were "cashing out to cover losses and meet margin calls in other markets," RBC Capital Markets said in a note, referring to Friday's drop. "We do not view this as a loss in faith in gold's role as a 'perceived safe haven' or a fundamental shift in the attitude towards gold."

Spot gold gained as much as 1.3 per cent to US$1,606.68 an ounce, and was at US$1,603.98 at 6.32am in London after trading lower in the initial period of the Asian session. On Friday, prices fell as much as 5 per cent.

CENTRAL BANKS

Investors are assessing gold's outlook amid signals that the Federal Reserve will join other global central banks in easing policy. Chairman Jerome Powell opened the door to a cut at the March 17-18 meeting by issuing a rare statement Friday pledging to "act as appropriate" to support the economy.

"With the coronavirus spreading globally and the Fed looking at the possibility of a rate cut, the upward momentum in gold prices is likely to remain intact," said Howie Lee, an economist at OCBC Bank.

Goldman Sachs Group Inc economists said they now expect the Fed to cut its key interest rate by 50 basis points this month, and flagged the possibility of a coordinated move with other policymakers.

The Bank of Japan issued an emergency statement as the week began, saying it will "provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases".

While gold prices sank on Friday, investors continued to buy into bullion-backed exchange-traded funds. The worldwide total expanded 8.6 tonnes to a record 2,634.4 tonnes, according to an initial tally compiled by Bloomberg.

Among the signs of the economic pain being caused by the disease, Pacific Investment Management Co said there may be a 6 per cent contraction in China's first quarter gross domestic product.

"I think we're seeing responsiveness to flagged central-bank actions," Michael McCarthy, chief market strategist at CMC Markets in Sydney, said, referring to gold's rebound. "A flip back to US$1,600 could be useful in the short term, that in itself might bring further support over the coming hours and into the European session."

BLOOMBERG