Gold Peeks Above $1,700 amid Coronavirus Fears and Market Turmoil / Commodities / Gold & Silver 2020

On Sunday, Italy registered a huge jump in new casesof the COVID-19, the stock market plunged,while the oil market crashed. Tuesday morning, and Italy is on lockdown. Meanwhile,gold jumped above $1,700. What’s next for the yellow metal?

Gold Jumps Above $1,700

Last week, I wrote that:
 
from thefundamental point of view, the environment of fear, ultra low interest rates,weak equity markets and elevated stock market volatility should be positive for the yellow metal (…) the good news is thatthe markets expect further Fed’s interest ratecuts on the way – it lays the foundation for future gains in the gold market.

And indeed, we did not have to wait long for moregains. On Sunday, gold jumped briefly above$1,700, reaching another psychologically important level, as the chartbelow shows. The yellow metal made it to this price point for the first timesince late 2012.

Chart 1: Gold future prices from March 3 to March 9,2020.

Yes, you guessed, goldwent further north amid the growing spread of the COVID-19. Data reported to the World Health Organization by March 8shows 105,586 confirmed cases in the world, of which 24,427 originated outsideChina. Actually, over 100 countries have now reported laboratory-confirmedcases of the new coronavirus.

What is really disturbing is that Italy reported a huge jump in total cases and deaths from the COVID-19on Sunday, a surge from 4680 and 197 to, respectively, 7424 and 366, as onecan see in the chart below. The jump in figures comes as the Italy’s governmentintroduced a quarantine of 16 million Italians in the Lombardy region and 14provinces and announced the closure of schools, gyms, museums, ski resorts, nightclubsand other venues across the whole country. In the US, more than 500 people havebeen confirmed to have the virus and more than 20 of them have already died.

Chart 2: Total number of confirmed cases of COVID-19in Italy from February to March 2020.

The spreadof the COVID-19 increased the risk of a full-blown world pandemic and global recession. Theexpected economic slowdown slashed the demand for oil.To make matters worse, the OPEC and Russia did not agree on production cuts.Instead, the Saudi Arabia slashed its April official selling price andannounced plans to raise production in a bid to retake market share. As aconsequence, the WTI oil price plungedbelow $30, or 34 percent in the biggest crash since 1991, as the chartbelow shows.

Chart 3: WTI oil price from March 3 to March 9, 2020.

Moreover, the stock market plunged again. The futures on S&P 500went down 4.5 percent on Sunday evening in North America, and closed 7.5% lower(that’s over 225 points down). It’s not surprising that investors are fleeingequity and oil markets and increasing their safe-havendemand for gold.

Another positivefactor for the gold prices is the collapse in the bondyields. The 10-year interest rates have plunged below 50basis points on Sunday. As a reminder, in December 2019, the yield was slightlybelow 2 percent. It means a huge change. The bond market action implies thatinvestors are expecting recession and the Fed’s accommodative response. It would behard to imagine better conditions for gold to shine. 

Chart 4: US 10-year Bond Yields from March 3 to March9, 2020.

Implicationsfor Gold

What does it all mean for the gold market? Well, I amof the opinion that the prospects for gold are positive. We have not yetreached the full-on panic. The epidemiological peak is still ahead of us. WithItaly rolling out a massive quarantine, the fears over the COVID-19 impact onthe supply chains and the global economy will intensify. Moreover, the biggestheadwind to the gold market, i.e. strong US dollar, has been removed. As the Fed’s interest rates cut worked to soften the greenback, goldcan now benefit from both the safe-haven demand and the weak US dollar.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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