Gold is safe below $1,600, price recovery is coming — analysts
(Kitco News) After nearing $1,700 at the beginning of the week, gold prices surprised with a major sell-off despite a plummeting stock market.
The Dow plunged 1,000 points for the third time this week on Friday as stocks’ sell-off accelerated amid concerns of the coronavirus outbreak getting worse. Gold prices also sold off, falling 4% on the week. April Comex gold futures were last at $1,582.20, down 3.67% on the day.
“Stock market’s plunge has been driven by fears that the coronavirus is becoming more of a global pandemic than preciously seemed likely,” Capital Economics U.S. economist Andrew Hunter told Kitco News on Friday.
Analysts say that when the risks get too high in the stock market and the situation too dire, investors respond by selling gold to meet margins.
“When you have periods of market turmoil like this, gold usually sells off with the market to generate liquidity and cover margins,” said TD Securities commodity strategist Ryan McKay.
Many investors are rushing into cash, said RBC Wealth Management managing director George Gero. “Some sellers see the need to be in cash for now to meet margin calls elsewhere,” Gero stated.
Also, gold positioning has been too overcrowded on the long side, which has exacerbated the sell-off.
“What we are seeing now is a product of gold’s very stretched positioning, where we had record number of longs and a record number of traders long. Essentially, there was no one left to buy the tops anymore. We likely saw some of those who have bought at the elevated levels on the run-up to $1,680 get shaken out as well as there is probably some profs-taking here,” McKay said.
Heading into next week, some of that excess length will be taken out, according to the strategist. “We are looking at $1,600 as the key level. Maybe slightly below that,” McKay said.
Positioning below $1,600 is embedded in slower growth outlook and more central bank rate cuts rather than fear-driven haven bids.
“Ultimately, gold will start to move higher again once the initial sell-off is out of the way. We can find the bottom of the shakeout next week,” McKay noted.
The primary driver next week remains the coronavirus outbreak, especially headlines related to the virus spreading in Europe and North America.
World Health Organizationc (WHO) raised its coronavirus threat assessment to “very high” across the world on Friday, noting that the virus has spread to at least 49 countries.
“We have now increased our assessment of the risk of spread and the risk of impact of COVID-19 to very high at global level,” WHO director-general Tedros Adhanom Ghebreyesus said.
Earlier this week, the CDC said that the U.S. is likely likely to see an uptick in cases.
“That is a downside risk,” Hunter said. “We can safely say that if there was a major national outbreak in the U.S., you could be looking at a recession simply because it will be very likely that consumer spending would fall very sharply. Even if don’t get that kind of an outbreak, there are some downside risks to the economy that are starting to mount.”
Watching the central banks
On a more long-term basis, the outlook for gold remains very positive as markets expect to see a start of another major easing cycle by the world’s major central banks as they respond to the coronavirus fallout.
“This virus is potentially pushing banks to act more aggressively so we could get deeper rate cuts. Gold is attractive longer-term as a hedge against real interest rates, which should be extremely low or negative,” McKay said.
Eyes are also on Federal Reserve Chair Jerome Powell this weekend as there is “talk” that he “will be meeting other central bankers this weekend, which is spurring speculation of coordinated action,” said Bannockburn Global Forex managing director Marc Chandler.
The CME FedWatch Tool is currently showing a 52.8% chance of a 25bp rate cut on March 18 and a 47.2% chance of a 50bp cut.
“There’s a fairly good chance we could see some kind of policy loosening over the next couple of months,” said Hunter.
The market’s aggressive expectations of further rate cuts in the U.S. can also force the Fed’s hand to cut, added Hunter. “If the general situation stays as it is, let alone continues to deteriorate, and the Fed were to not follow through and cut rates then it could cause a fair nasty reaction,” he said.
Another supportive driver for gold is the U.S. presidential election. Next week will see the Super Tuesday Democratic primaries in 15 states. And there is a high chance that Bernie Sanders comes out on top.
“On the political side we gear up for Super Tuesday (3 March), with expectations high that Bernie Sanders will do well here – gold is our clear hedge against political angst here,” Pepperstone head of research Chris Weston said on Wednesday.
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Data on the radar
U.S. macro data next week could be viewed as less important even though traders will get a look at the U.S. nonfarm payrolls report, said McKay.
“On the data calendar, we will have some readings of manufacturing ISM in the U.S. as well as the jobs number. Although with what’s happening now, the economic data might be losing a bit of its market power, at least the U.S. data,” he said.
Chinese manufacturing numbers will be important to monitor as they will show “impact of the virus and just how bad things contracted,” McKay added.
Chinese manufacturing PMI numbers are due out on Saturday. The U.S. ISM manufacturing PMI are scheduled for Monday, followed by the U.S. ISM non-manufacturing PMI figures on Wednesday, factory orders on Thursday, and nonfarm payrolls on Friday.
The Bank of Canada will also be announcing its interest rate decision on Wednesday, with markets projecting no change in rates at the March meeting.