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Gold market on alert for further central-bank activity

Kitco News

(Kitco News) - Gold traders will be watching closely to see whether still more central banks follow the Federal Reserve in cutting interest rates because of the coronavirus, and if so, the metal may get a further boost, analysts and strategists said.
Meanwhile, some market watchers cautioned not to automatically expect gold to move inversely to stocks should equities go into another tailspin, as gold is sometimes sold at times like these to raise cash to meet margin calls and offset losses in other markets.
For now, gold is pausing after the Comex April futures soared by 3.1% on Tuesday, when the Fed announced a surprise rate cut of 50 basis points. Gold essentially recaptured the lost ground from Friday’s big down day. As of 10:20 a.m. EST Wednesday, spot metal was 90 cents softer at $1,639.20 an ounce.
“The market is still paying attention to how central banks globally react to the coronavirus news and whether these interest-rate cuts continue from country to country to country,” said Phillip Streible, chief market strategist with Blue Line Futures. “That’s the key.”
In recent weeks, markets have grown jittery on worries that the virus will disrupt the global economy, shutting down factories, cutting into tourism travel and more. Technology giants Apple Inc. and Microsoft Corp. have issued sales warnings in recent weeks, and an industry group reported Wednesday that Chinese car sales fell 80% last month.
The Reserve Bank of Australia also cut interest rates on Tuesday, and the Bank of Canada did the same on Wednesday. Central banks in other Group of Seven nations, including the European Central Bank, are expected to follow, Streible said.
“Easier monetary policy generally supports the gold market as traders don’t see any kind of benefit from keeping the money in the bank...and not getting any interest whatsoever,” Streible said. “They put it to work by buying gold and silver.”
With the cut in the Federal funds rate Tuesday, 10-year U.S. Treasury yields fell below 1% for the first time.
“We assume that other central banks will follow the Fed’s example and will likewise loosen their monetary policy in the near future,” said Daniel Briesemann, an analyst with Commerzbank. “Our economists expect the ECB to follow suit at its meeting next week. Though it is not clear which concrete steps it will undertake, we believe that it could temporarily double its monthly bond purchases to €40 billion and lower the deposit rate by 10 basis points to -0.6%.
“In our opinion, the gold price is likely to climb further in the short term on the back of new easing measures by various central banks.”
Meanwhile, John Weyer, co-director of commercial hedging with Walsh Trading, commented that traders should not automatically expect gold to rise on safe-haven buying if equities take another steep tumble. This is because last week, many market participants had to liquidate gold positions in order to raise cash as equities fell, he said.
However, that doesn’t mean gold has lost its role as a safe haven, said Suki Cooper, an analyst with Standard Chartered. In fact, gold last week served that role by acting as a “high-quality liquid asset” and source of cash when investors needed it, she continued.
“The sharp sell-off in gold [along with stocks] may at first appear surprising given that gold may be expected to continue to benefit from safe-haven flows amid continued uncertainty, particularly given the market had been pricing in a greater likelihood of an imminent Fed rate cut,” Cooper said. “Nevertheless, gold was actually fulfilling its safe-haven role.”
There was a similar response to the Lehman Brothers bankruptcy and global financial crisis in autumn of 2008, she pointed out. Back then, gold fell from roughly $900 to $700, but then rallied in the months ahead to trade above $1,000.
“We continue to expect further upside risk for gold, but gains may be measured if equity markets start to weaken again,” Cooper said.

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