Gold Price May Ride the Tailwind of Virus Uncertainty, Soft US Dollar

Gold prices have recently broken out above a key level at US$ 1,750 and edged higher. Global growth uncertainties resulting from the coronavirus and concerns over the economic recovery is inhibiting risk appetite and boosting demand for safety. As the likelihood of a pause in opening-up rises alongside Covid-19 cases around the globe, investors may look at precious metals as a defensive choice compared to stocks and bonds. The recent rally in gold prices and selloff in the Wall Street is reflecting a swing down of risk sentiment.

Gold price has exhibited correlations with mining companies (positive), central bank money supply (positive), underlying demand (positive), inflation (negative), the US Dollar Index (negative) and the broad stock market (negative). A summary of the observed correlation is summarized in the table below. Surging money supply from the Fed and other central banks around the world suggests more liquidity are injected into the financial system, and thus would may buoy gold prices. A softening US Dollar in recent weeks has further propelled commodity prices, including crude oil and precious metals.

Physical demand for gold, however, is a bit tricky. A slowdown in the global economy as a result of the Covid-19 pandemic may quench investors’ demand for jewelry, watches and investment in the physical gold. In Asia, the slowdown of China’s economy, which remains world’s largest purchaser of the metal for jewelry and investment purposes, may hurt consumers’ gold spending this year. Last year, China’s demand for gold has already fallen by 14% YoY due to trade war and macro headwinds. The overall annual consumption of gold this year is expected to remain below 2018’s peak.

GOLD DEMAND OUTLOOK:

Gold’s forward price curve is in a contango, with far-dated price trading higher than the near date’s. However, a poll by Bloomberg suggest gold price may consolidate at 1,700 through to Q4 this year and even drop to 1,600 in 2022 (table below). This suggests how divergent the opinions from traders and economists are on gold prices.