(Kitco News) Trying to measure economic fallout from the coronavirus is a difficult task, but when it comes to figuring out the virus’ impact on gold, investors should be paying attention to what central banks around the world are doing.
Any additional easing that might stem from slower economic growth will boost the case of holding gold long-term, said Rhona O’Connell, INTL FCStone head of market analysis for the EMEA and Asia regions.
“The potential industrial fallout from coronavirus is already leading a number of governments to cut interest rates or add to easing activity, while the U.S. 10-year bond has been dipping in and out of negative territory. This is all positive for gold in a risk-averse environment, although by definition we cannot know for how long it will be before this outbreak is controlled,” O’Connell wrote on Wednesday.
Equities have been rising this week as they recover from an earlier sell-off triggered by coronavirus fears. Gold saw some selling but managed to hold its $1,550 support level and consolidate above the $1,560-an-ounce level.
“The ?nancial markets have been a hive of activity since China’s return and after a rout on Monday … There was an almost palpable wave of relief on Tuesday when the People’s Bank of China (PBoC) continued injecting liquidity on a grand scale. This propelled Chinese equities higher and equities around the world were happy to take their cue accordingly,” O’Connell said.
But these market moves are just short-term noise, she added. What investors should be focusing on is what central banks from around the world decide to do next when dealing with the economic fallout from the virus.
“Asian governments are already starting to look at interest-rate decisions,” O’Connell pointed out. “Thailand has already cut rates … to a record low of 1.0% for its benchmark rate, arguing that a large number of businesses would be a?ected by the coronavirus as well as drought and a delay in passing the budget.”
The Philippines’ central bank also cut rates this week by 25 basis points to 3.75% in response to the coronavirus.
On top of that, the Reserve Bank of Australia could be looking at cutting rates soon if economic growth is not fast enough in light of bush?res and coronavirus fallout. Other countries that recently cut rates further include Iceland and Bahrain. The European Union and Japan’s interest rates are already in the negative territory, O’Connell added.
“The interest-rate environment and the injection of liquidity into di?erent economies could well add a supportive factor to the market. Arguably this is already being priced in, but it should continue to be a tailwind in an era of ?nancial risk,” she wrote.
Author: Anna Golubova