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Coronavirus underpins gold; $1,600 break would trigger chart buying

Kitco News

(Kitco News) - Gold futures have risen to their highest level in nearly three weeks, drawing a safe-haven bid amid worries about China's coronavirus spreading and hurting the global economy, as well as a weekend attack on the U.S. embassy in Iraq, traders and analysts said.

Look for momentum-based chart buying to add further steam to the rally should these factors push gold above $1,600 an ounce again, one strategist said.

As of 9:57 a.m. EST, Comex February gold was $6.90, or 0.43%, higher to $1,578.50 an ounce. The metal peaked at $1,588.40, its most muscular level since Jan. 8 when worries about a possible war between the U.S. and Iran prompted a safe-haven bid.

"A big part is that is the coronavirus hitting stocks and possibly spreading," said Daniel Pavilonis, senior commodities broker with RJO Futures. "The market is trying to factor in what type of dent in global GDP [gross domestic product] from a slowing down in the world's second-largest economy and [the virus] spreading into other countries. It could be pretty big."

All three of the major U.S. stock indices opened at least 1.8% lower on Monday.

George Gero, managing director with RBC Wealth Management, commented he often describes gold prices as a barometer of geopolitics and the economy, rising when conditions are worsening, and vice-versa.

"Now it is also a barometer of our well-being," he said, referring to the health scare boosting gold.

While the virus is capturing the bulk of the headlines in the financial press early Monday, traders also listed to still other factors prompting a bid in gold. Phil Flynn, senior market analyst with Price Futures Group, cited the rocket attack on the U.S. embassy in Iraq.

"There is a mixture of geopolitical risks, along with concerns about the fallout from the coronavirus and how that will affect capital flows going forward," Flynn said.

Uncertainty about the U.S. impeachment process and Brexit may also be lending some support to the precious metal, Gero said.

Flynn looks for gold to maintain a bid while the market continues to monitor the factors currently underpinning prices.

"We should see the strength at least until midweek until we get more answers about the virus and the response [to the attacks] from the U.S.," Flynn said.

Should gold top $1,600, however, momentum-based buying would likely be triggered, Pavilonis said.

"At $1,600, it would become more technical," said Pavilonis. "Then I think you would see buyers come in on [an expectation] for more of a longer-term trend and buy, whether this virus fizzles out or not. We're getting close to the old highs."

While gold is higher so far Monday, Commerzbank did characterize the virus as both a "blessing and a curse" for the yellow metal.

Risk aversion has risen, the bank pointed out. Thus, gold is being bought as a "crisis currency" and safe haven, Commerzbank said. But the virus also may be curbing gold purchases in China, the world's largest gold-consuming nation, analysts continued.

"While gold is in demand as a kind of insurance for financial investors – as can be seen primarily from the ongoing ETF [exchange-traded-fund] inflows – the coronavirus could depress physical gold demand in China," Commerzbank said. "Because public life there is grinding more and more to a standstill, some market observers expect less gold to be bought around the Chinese New Year's festival this year, which is normally a period of high demand."

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