Gold is trading near a seven-year high, supported by an increasing number of coronavirus cases worldwide that threaten to curtail global economic activity. Gold has been rallying not only due to the virus but also due to the overall global economic growth.
Corona Virus– gold has been rising amid continuing worries over the Wuhan coronavirus. The price of gold bounced back from the weekly low ($1625) as COVID-19 showed no signs of slowing down, and fears surrounding the coronavirus kept the precious metal afloat as the outbreak dampened the outlook for global growth.
Gold edged higher on February 26 after a sharp drop in the previous session, as investors sought safe haven assets following a warning from the United States over the potential domestic spread of the coronavirus.
Global economy- After surging 18% last year, gold has extended its rally in 2020, with prices hitting the highest since 2013. The haven has been favoured as the virus outbreak has spread beyond China, threatening a pandemic and slower growth.
Perhaps, the worst case scenario to the global economy could start to materialize and that is keeping gold prices bid because everyone is concerned that the virus is leading to low yields.
The weakening outlook for global growth is likely to put pressure on major central banks to provide monetary support, and the low interest rate environment may heighten the appeal of gold as authorities like the European Central Bank (ECB) rely on non-standard measures to support Euro area.
It remains to be seen if the ECB will venture into uncharted territory as the Governing Council remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.
Federal Reserve– the Federal Reserve is expected to enact more “insurance” rate cuts as it looks like the U.S. economy has been impacted by the coronavirus. The virus could have a more significant impact than the trade issues had on the economy last year.
Friday preliminary PMI data showed that sentiment in the U.S. service sector contracted for the first time in more than six years.
The market is finding it difficult to look further into the medium term due to uncertainty regarding what the virus will do to the global growth. There are beliefs that central banks may cut rates sooner than later. Lower interest rates reduce the opportunity cost of holding non-yielding bullion resulting in a push in gold prices.
Gold has marked the longest winning streak since June, with the price for bullion trading at its highest level since 2013, and the precious metal may continue to exhibit a bullish behaviour as market participants look for an alternative to fiat currencies.
Besides the safe-haven demand, a growing number of people are buying gold in anticipation of weaker growth from the spread of coronavirus and action from the Fed.
So far, economists have only snipped their expectations for the economic impact on the United States and the profits of American companies. But the sharp tumble in stocks — and more importantly bond yields — on Monday suggests investors are quickly moving beyond those relatively rosy views.