Gold's $1,600 level to remain elusive, prices to test physical floor - Standard Chartered
(Kitco News) Gold's attention will turn to weak physical market demand as coronavirus is brought under control, according to Standard Chartered, which sees the precious metal likely testing its physical floor.
“Gold’s price floor is yet to be tested and as coronavirus fears ease, physical market demand will be key, which has been reported to be weak in both India and China,” Standard Chartered precious metals analyst Suki Cooper wrote on Thursday. “If the virus is brought under control, gold prices are likely to test the physical floor.”
The physical demand is looking quite weak this year, especially when it comes to retail demand in India and China.
In China, coronavirus is partly to blame as “several retail stores … have noted likely downgrades to their sales due to store closures across China as well as travel restrictions,” Cooper wrote.
“Some estimates suggest sales could fall as much as 70% y/y in Q1-2020. Volume traded on the Shanghai Gold Exchange (SGE) is notably lower m/m, despite being compared to a month with an exchange holiday; SGE premia have slowly edged lower,” she added.
In India, demand could fall 20%-25% in February as consumers remain cautious amid high local prices, said Cooper, citing the India Bullion & Jewellers Association.
Central banks are still buying gold, but the level of purchases will likely be lower than in 2019, Cooper said. “Turkey added 46 tonnes in January, a strong start to the year. However, in January, China’s gold reserves remained unchanged at 1,948.3t for the fourth straight month.”
On Thursday, gold saw additional gains as news of the 15,000 new coronavirus cases broke and brought back some fear into the market.
“Gold prices have picked up again after the revised methodology added 15,000 new cases in the Hubei province. While longer-term investors had continued to add to gold exposure, tactical investors had started taking profit as well as shorting gold, suggesting positioning was far from overcrowded and drove a quick response,” Cooper pointed out.
At the time of writing, April Comex gold futures were trading at $1,579.10, up 0.48% on the day.
Despite Thursday’s gains, it is unlikely that investors will see a move above $1,600 an ounce on a sustained basis this month, according to Standard Chartered’s projections. The bank estimates for gold to average $1,540 in Q1 and $1,580 in Q2.
Gold prices managed to stabilize at higher levels without testing their floor, but as coronavirus fears ease, there is a chance for gold to head lower, Cooper noted.
“Gold prices have eased, but have yet to test the floor provided by a weaker physical market, in light of weak jewellery demand in China and India,” she wrote. “…Because the physical market has yet to be tested, there is scope for prices to soften, particularly if equity markets continue to extend their gains.”
With fears easing worldwide, gold’s gains have slowed. But, traders are keeping a close eye on the extent of the coronavirus impact on the global economy. Standard Chartered projects for China’s Q1 GDP to slow to 4.5% year-over-year.
“The coronavirus outbreak continues to dominate news headlines. Decisive measures have been taken to contain the outbreak in China; if these are successful in reducing newly confirmed cases by mid-February, the spread of the virus may be arrested by mid-March,” Cooper wrote.
Federal Reserve rate cut expectations are also beginning to pop up, which is supportive for gold long-term.
“Gold has rallied in both risk-on and risk-off environments over the past year, partly as a potential hedge; but near-term, Fed rate cut expectations are resurfacing as a prominent factor for gold,” Cooper said. “Gold prices continue to track UST real yields most closely, but the inverse correlation with U.S. equities has strengthened as well.”