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Metals Focus: global macroeconomic backdrop supportive for gold

Kitco News

(Kitco News) - Gold’s immediate fortunes are being dictated by the coronavirus outbreak, but the global macroeconomic backdrop is generally supportive for the metal, said the consultancy Metals Focus.
High prices have hurt physical demand in vital gold-consuming countries, but this has been offset by investment buying, Metals Focus said Tuesday in a report titled, “Bull market for gold to remain in place for some time to come.”
Gold has been stronger lately, while stocks were on the defensive amid worries about the damage the virus could cause to the global economy. Initially, gold’s gains on the virus outbreak were limited, maybe on ideas that the impact would be short-lived, Metals Focus said. But that view began to change as companies began to warn about the potential impact on earnings, including a sales warning from Apple Inc. last week.
Gold soared on to a seven-year high on Monday when the Dow Jones Industrial Average fell by more than 1,000 points, although the metal has since given back some of those gains.
“In the very short term, investor sentiment will remain affected by coronavirus concerns; if the number of infections continues to surge, this will favor safe-haven assets,” Metals Focus said. “By contrast, easing fears about a pandemic may well lead to profit-taking in gold, particularly taking into account elevated holdings in gold ETPs [exchange-traded products] and Comex futures.”
However, any downward correction in gold is likely to be temporary due to signs of weakness in the global economy that began appearing even before the virus outbreak, Metals Focus said. This includes the U.S., with softer readings in Purchasing Managers Indexes for the service sector, along with an inverted U.S. yield curve.
“Expectations about a rate cut by the Fed have been brought forward as early as April, and yet more aggressive monetary loosening is expected in other key reserve currencies,” Metals Focus said. “The continued proliferation of negative-yielding debt, therefore, should keep the cost of carrying gold at minimal levels.”
Further, the virus means caution about corporate earnings could mean stock-market volatility.
“This in turn could encourage some asset rotation back into gold, especially given the yellow metal’s fairly low share of total assets to many institutional investors.”
High prices in other currencies have hurt physical demand, which is likely to remain “lackluster” for a while, the consultancy said. Strength in the U.S. dollar has meant gold prices hit all-time highs in local currencies in several countries, including India, Iran, Turkey, the euro zone and the U.K. But while this has curtailed fresh consumption, at least it has not led to “meaningful selling back” into the market, Metals Focus said.

“All that said, the weakness in underlying physical demand should still only serve as a drag on gold, and this should still be comfortably offset by an increasing appetite for bullion among institutional investors,” Metals Focus concluded.

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