The coronavirus outbreak has triggered further risk sell-offs, but is not alone in providing a lift to the gold price, according to BullionRock Managing Director Robin Newbould.
“In 2019, pre-virus, gold gained circa 20% thanks to low global economic forecasts, low-to-negative interest rates, expectations of a weaker U.S. dollar, trade wars and possible real wars. All pretty miserable stuff, now we think about it, but no barrier to generating positive, non-correlated returns that hold their own when compared to other assets,” he told CNBC via email on Monday.
“Little wonder then that central banks purchased a record $15.7bn of gold in the first six months of last year.”
While mainland China accounts for more than 28% of the world’s physical gold jewelry, bar and coin demand (848 metric tons in 2019 according to the World Gold Council), J.P. Morgan analysts highlighted that gold prices have been supported by the demand for safety and falling U.S. Treasury yields, with the market pricing in a higher probability of a June rate cut from the U.S. Federal Reserve.
In a note published Monday, the bank’s Global Commodities Research team also pointed out that unlike during the U.S.-Iran dispute, gold prices have actually lagged Treasury yields on this occasion. The gold price rose by only $17/oz last week following a 13.5 basis point fall in U.S. 10-year real yields, which should ordinarily have translated to around a $43/oz increase based on historical patterns.
“First, from a valuation perspective, gold never really gave back the >$130/oz premium to yields it initially built up in early January so a bit of underperformance now seems like payback that is working to normalize its valuation (premium is now down to about $94/oz from $130/oz a week prior),” J.P. Morgan Metals Analyst Natasha Kaneva said.
A second reason for the underperformance, the Wall Street bank hypothesized, is physical demand concerns arising from the virus.
“Given this, it seems fair to us that prices could also be discounting a sizable first-quarter hit to retail sales in Asia, a region that accounts for more than 60% of global gold jewelry and bar and coin demand if India is included,” Kaneva explained.
“Hence, even as ounces have still flown steadily into global ETFs (up ~700 thousand ounces last week) concerns about underlying physical demand have likely kept some investors on the sideline for now.”
Reference: CNBC
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