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Gold Price Rebound May Fizzle on Coronavirus Economic Impact

Gold price chart XAUUSD

GOLD PRICE FORECAST: NEUTRAL

  • Gold prices rebound as Fed leans in to banish credit crisis stress
  • Fears about economic downturn might revive liquidation pressure
  • US retail sales, Chinese GDP data topping the economic calendar

Gold prices were trading at 2020 lows a mere month ago as the coronavirus outbreak battered credit markets. Lenders worried about the viability of would-be borrowers as global growth ground to a halt pulled back capital. That pushed up borrowing costs and drove desperate market participants to liquidate, with gold finding itself on the chopping block alongside stocks as well as cyclical currencies and commodities.

The metal has since fully retraced these losses as the markets voted their confidence in the Fed’s herculean efforts to prevent a 2008-style credit crunch. The central bank made its QE program open-ended, established the FIMA repo facility allowing large Treasury holders to temporarily swap the bonds for cash, and announced $2.3 trillion in new lending to small- and medium-sized businesses as well as municipalities.

Investors’ spirits seemed genuinely uplifted. The so-called TED spread – a measure of credit market stress that looks at the difference between lending rates on 3-month offshore Eurodollar deposits and analogous Treasury bills – has dropped from a nearly four-year high north of 70bps to a much more manageable 36bps. That broadly matches the trend average prevailing since the 2008 crisis (~33bps).

GOLD PRICES MAY FALL AS LIQUIDATION RETURNS AMID GLOBAL SLOWDOWN

The key question now is whether optimism is sustained. While policy stimulus seems to have been effective thus far at prying open credit markets, its capacity to drive a lasting pickup in economic activity seems limited. Cheap credit and subsidized purchasing power are probably not very useful beyond the admittedly helpful optics of bold action since they can’t be truly leveraged amid a widespread lockdown.

For growth to truly rebound, people must emerge from the hiding places and re-engage with the economy. That doesn’t seem to be on the menu for now as new Covid-19 cases continue to emerge along a steep upward-sloping curve, suggesting the outbreak rages on with gusto. The longer this is delayed, the more likely it is that the disruption will trigger severe stress, probably in some cyclical bit of the financial system.

The rush for cash is likely to be re-engaged as traders ponder this scenario, with capital flooding to the volatility-dulling liquidity of the US Dollar as gold prices fall. Inspiration to this end may come as the spring meetings of the IMF and the World Bank produce plenty of downbeat soundbites from key officials. Soft US retail sales and Chinese GDP data may offer further encouragement.

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— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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