Gold's new price floor of $1,550 is its 'buying opportunity' — Scotiabank
(Kitco News) Coronavirus fears have triggered renewed growth concerns around the world, making gold at $1,550 an ounce a new price floor and a buying opportunity, according to Scotiabank’s latest commodity strategy update.
“$1,540-$1,550 is a buy opportunity, and the start of a new floor into a year where growth risks are firmly tilted to the downside,” wrote Scotiabank commodity strategist Nicky Shiels on Thursday. “Technically, the uptrend support since the U.S./China phase one deal announcement has been broken, ensuring $1,550 is the new and tentative floor.”
Coronavirus-related growth fears could force more central banks around the world to ease monetary policies, especially in countries directly impacted by the coronavirus, Scotiabank’s update said.
“Gold is under priced & cheap given reigniting growth fears which is being fought with additional stimulus from (virus infected) CBs, but also the Fed who could be induced to cut earlier, or at the very least, expand their BS [balance sheet] at a faster pace; they’ve shown that they can quickly respond to any threat to global growth,” the update stated.
At its January meeting, the Federal Reserve kept interest rate in a range between 1.5% and 1.75%. When asked about coronavirus, Fed Chair Jerome Powell said that the Fed is “carefully monitoring the situation,” noting that there will likely be “some disruption” of activity in China and possibly globally.
On Friday, Powell once again brought up the coronavirus in the central bank’s semi-annual report to Congress. “The effects of the coronavirus in China have presented a new risk to the outlook,” the report said.
The U.S. dollar has been capping gold’s upside breakout so far this year, but the $1,600 an ounce remains the yellow metal’s upside target, said Shiels.
“Short-term price reaction ahead of $1,600 was disappointing - many expected Gold to breakup above $1600 and hold as it got handed the new (Corona) catalyst, but its refusal to bust up/out was due to both a stronger US$ (competing for similar safe haven flows) and the lack of physical Asia participation/buying,” the strategists explained.
Going forward, weaker Asian demand for the physical metal will be offset by increased Western safe-haven bids. “(Physical) demand destruction should be offset by Western inflows hinged on the theme of slower economic / growth forecasts being fought with additional stimulus,” Shiels said.
The economic fallout from the coronavirus could also reignite last year’s trade tensions as growth outlooks get slashed, the strategist added.
“Macro demand fears shift from Trade to Coronavirus in 2020, but Corona virus impact has potentially larger demand implications as China continues to physically ‘unplug’,” she said. “Virus headline risk & uncertainty remains high, trade issues may reemerge given the dent to demand, and consensus Chinese GDP at about 6% YoY is likely to be convincingly downgraded.”
At the time of writing, April Comex gold futures last traded at $1,576.50, up 0.20% on the day.