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Gold hits new highs as virus outbreak spreads

A weekly market summary for gold, Feb 17-22

GOLD hit a seven-year high last night, extending the rally to six days as concerns over the coronavirus re-emerged that the pandemic was spreading further afield from Asia. Japan and Korea reported their first fatality from the virus. China also announced that factories and firms in Hubei province would remain closed until March 10. Concerns about corporate earnings in the US and elsewhere come back to haunt investors, benefiting gold.

There was also speculation that the Fed may consider easing monetary policy towards the end of the year, which helped to elevate gold prices. Remarkably, strength in the US Dollar Index, which is traded on the ICE Exchange, did not dampen gold's strength. The index hit a 100 after a two-year lull.

What should investors look out for in the longer term?

The sentiment for gold has turned bullish as the spread of the coronavirus continues to lower expectations of economic growth in China and other Asian countries. Central banks have already started to be accommodative with rate cuts and increased liquidity. Additional liquidity in markets is bullish for gold. Financial uncertainty and geopolitical uncertainty combined by low interest rates will likely boost gold investment demand.

Central banks are big buyers and sellers of gold. Net gold purchases by central banks will likely remain robust for the year. There are also signs that inflation is increasing in China as reflected in the jump in Chinese consumer prices. Inflation is normally positive for gold. On the other hand, expectations of weaker economic growth in large consumer countries like India and China may result in weaker demand and act as a damper on prices.

Technical Analysis for  Comex Gold (GCJ20)

Gold prices continue to break new highs establish earlier in the month to reach seven year highs. The technical support levels of US$1,620 and US$1,600 an ounce are immediate levels at which support stands. Top side resistance stands at US$1,650, followed by US$1,700.

Weekly Market Assessment: Bullish but technical indicators are showing overbought conditions.

  • Avtar Sandu is senior manager, commodities, Phillip Futures