There are a number of things in play. First, in December, the Federal Reserve ruled out any interest rates cuts this year. The FOMC reiterated this statement during the meeting held in January. In theory, a dovish statement by the Fed is usually negative for the dollar and positive for gold.
Second, the spreading coronavirus disease presents more risks to the global economy.
These are risks that were not there in December. Economists are still torn about the central bank’s response to the disease. In Europe, Christine Lagarde has warned that the bank may not have the right tools to respond to the illness. This week, Jerome Powell is likely to comment on the Fed’s response to the disease when he addresses congress.
Third, the demand for gold is increasing. According to the World Gold Council, inflows into gold ETFs increased in January. Gold-backed ETFs added more than 61 tons of gold in January. This brought total holdings to an all-time high of more than $2.1 trillion. At the same time, data from the CFTC shows that large speculators (non-commercial hedgers) have continued to accumulate gold.
The earnings season has also played a role in the price of gold. In the past three weeks, more than 60% of the companies in the S&P500 have released their fourth-quarter earnings. According to Factset, on aggregate, these companies have reported earnings that are 4.6% above estimates. This has led investors to increase their holdings in stocks. As a result, all major indices in the United States are trading close to their all-time highs.
Meanwhile, political temperatures in the United States are rising. Just last week, Donald Trump was acquitted by the senate. In the same week, Democrats botched their first primary in Iowa. According to Gallup, Trump’s job approval rating is at its record high. It is still early to predict who will win the November 8 election. However, early indications show that Trump stands a good chance to win the next election.
In the coming days, gold traders will look at several catalysts. First, we will look at the coronavirus disease. The disease could affect the physical gold market. This is because, in China, most stores have closed in response to the disease. If the disease spreads, more stores in Asia could be closed, which will affect buying decisions.
Second, the disease could lead to more negative economic data from China and other countries. In China, most cities have been in lockdown, with most people staying indoors.
This could have significant implications on the global economy since most firms have some level of exposure to China. Indeed, many companies like Apple, Toyota, Honda, and Tesla have shut down their Chinese stores. As a result, data from China has been relatively weak. According to China Logistics, the country’s manufacturing PMI declined from 50.2 in December to 50.0 in January. The problem could get worse.
On the positive side, data from the United States has been relatively strong. On Friday, data from the Labour Department showed that the economy added more than 225k jobs in January. Wages rose slightly while the unemployment rate remained at the lowest level in almost five decades. Data from ISM showed that the composite PMI rose from 52.7 to more than 53.3. This was boosted by the services sector. The manufacturing PMI also rose to 50.9 in January. The core and headline PMI have remained above the Fed’s target of 2.0%. Therefore, the Fed will likely be at crossroads because it has to balance the past positive data from the US with the reality of the disease.
In all, there is a possibility that the price of gold will continue moving upwards. This is because the Fed could be forced to turn dovish as the coronavirus disease spreads internationally.
A dovish Fed is usually positive for the price of gold. This is because investors tend to move from safety havens to high-yielding stocks when interest rates are low. Also, the dollar tends to be weak in a period of low-interest rates. In addition, there will be potential volatility because of the upcoming election in the United States. Indeed, the CBOE volatility index, which is a measure of volatility has risen by more than 12% this year. This is a sign of fear in the markets.