Price of Gold Fundamental Weekly Forecast – Central Bank Responses to Virus Will Be Next Bullish Catalyst

Gold futures put in a strong performance last week, posting a solid gain as investors took on new long positions as a hedge against the economic impact of the coronavirus outbreak. For the most part, investors ignored the steep rise in the U.S. Dollar, which usually, impacts demand for the dollar-denominated asset.

Last week, April Comex gold settled at $1586.40, up $13.00 or +0.83%.

The rally was primarily driven by a drop in U.S. Treasury yields, while another sharp rise in global equity markets may have helped limit gains. Somewhat hawkish comments from Federal Reserve Chairman Jerome Powell also weighed on prices as well as signs of a strengthening U.S. economy.

Moving forward, gold traders are likely to focus their attention on the major central banks. Recently, central bank policymakers at the Reserve Bank of Australia (RBA), the Reserve Bank of New Zealand (RBNZ) and the United States offered no real commentary on the impact of the coronavirus on their economies other than they are watching.

Once economic data starts to come out of China then I think central bank policymakers will sit up and take notice, especially those countries that are major trading partners with China. Furthermore, although some experts are saying the coronavirus has peaked, last week rally in the gold market indicates that traders may not be sharing the same view.

Coronavirus and U.S.-China Trade Deal

U.S. President Donald Trump’s national security adviser, Robert O’Brien, acknowledged that the coronavirus outbreak could impact the Phase One trade deal between the United States and China, a CNN reporter tweeted last Tuesday.

Additionally, an analyst from the Milken Institute said the ongoing coronavirus outbreak is speeding up the so-called “decoupling” between the U.S. and China more than their trade war did.

“We talked about China and the U.S. decoupling. The coronavirus more than the trade war has sped some of that decoupling as countries, as businesses think about their supply chain for the long run,” said Curtis Chin, an Asia fellow at the Milliken Institute, calling it an “increased disengagement” of both economies.

Weekly Forecast

Longer-term traders should keep an eye on the central banks as they continue to monitor the impact of the coronavirus. They may be put in a position to provide stimulus for their economies if they are negatively impacted by the spread of the virus. This will underpin gold prices.

Federal Reserve Chair, Jerome H. Powell, warned lawmakers on Tuesday that the coronavirus epidemic sweeping China could pose broader economic risks, even as he signaled that the central bank was comfortable holding interest rates steady for now.

“We are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy,” Mr. Powell told House Financial Services Committee members.

“Some of the uncertainties around trade have diminished recently, but risks to the outlook remain,” Mr. Powell said. Still “the current stance of monetary policy will likely remain appropriate” as long as incoming economic information remains in line with the Fed’s outlook.

When asked by lawmakers about the coronavirus, Mr. Powell said the Fed was asking questions including:  “What will be the effects on the U.S. economy? Will they be persistent? Will they be material?”

“We know that there will be some – very likely be some – effects on the United States,” he said. “I think it’s just too early to say. We have to resist the temptation to speculate on this.”

RBA and RBNZ officials shared a similar viewpoint. Longer-term investors should pay closer attention to what the central banks have to say about the coronavirus’ impact on monetary policy rather than the day to day reports that actually represent “stale” data.