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PBOC easing will support gold prices and could start a global trend - analysts

Kitco News

(Kitco News) - A quiet start to the week is weighing on gold prices, but analysts remain optimistic that prices can push higher as easing from the People’s Bank of China could ignite a further drop in global interest rates.

Overnight, the PBOC the interest rate on its medium term loans in an attempt to counteract the economic hit from the growing coronavirus. However, the move has had little impact on gold prices as major North American markets are closed for holidays Monday. Spot gold prices on last traded at $1,581.40 an ounce, down 0.14% on the day.

Despite the weak price action Monday, many analysts are expecting that the PBOC’s latest move will continue to support the yellow metal.

Ole Hansen, head of commodity strategy at Saxo Bank, said that economists are still trying to estimate the full impact the spreading virus will have on the global economy. He added that this uncertainty will continue to support gold prices.

“We have seen monumental demand destruction this past month and that won’t be resolved anytime soon,” he said. “Central banks will be forced to ease again, but the question is just how much impact further easing will have.”

Looking at China’s economy, Bank of Montreal economists said that they have lowered their growth forecasts and expect China’s GDP to grow 5.25% this year.

“Given that China now accounts for just under 20% of global GDP, that downgrade translates… to a 0.2% cut to global economic growth,” the analysts said.

Afshin Nabavi, head of trading with MKS (Switzerland) SA, said that it is only a matter of time before gold prices push above $1,600 an ounce as growth fears continue to support investment demand.

Hussein Sayed, chief market strategist at FXTM, said that investors will get a better understanding of the Fed’s position on monetary policy following the release of the minutes from the January monetary policy meeting.

“Whether Chair Powell’s warning about the impact of the coronavirus outbreak on the US economy will potentially justify a further cut in interest rates remains to be seen, with speculators already pricing in a 43% chance of a rate cut by mid-year,” he said.

Although gold has room to move higher because of growing coronavirus fears, Hansen said that the precious metal still faces a significant hurdle: a saturated marketplace.

“There has been a lot of buying lately, but prices haven’t really gone anywhere,” he said. “Right now, there is no reason to sell your gold, but there are not a lot of new reasons to buy if we don’t see any new price action.”

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