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James Hyerczyk

Gold is trading higher shortly before the regular session opening on Thursday, bouncing back from yesterday’s loss, after the U.S. Federal Reserve’s decision to keep interest rates near zero and hopes of fresh European Central Bank stimulus.

The tremendous amounts of fiscal and monetary stimulus continue to provide long-term support, but the market is having trouble sustaining its short-term bullish momentum. This move is being fueled by selling pressure related to the easing of coronavirus restrictions. Nobody is certain if this is going to work but longs would rather lighten up now and reload later if the number of COVID-19 cases begins to increase again.

Focus Shifts to European Central Bank

The Federal Reserve left its interest rates near zero on Wednesday and repeated a vow to use its “full range of tools” to shore up an economy hammered by the pandemic.

Investors are now awaiting a policy decision from the ECB, amid pressure on the central bank to deploy even more firepower to prop up the economy.

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Coronavirus-related Speculative Buying Offsets Drop in Physical Gold Demand

Some traders are wondering how gold could post a strong 12.8% rally in prices in the first quarter despite demand dropping a staggering 26% as buying collapsed in the world’s two biggest consumers.

Total physical demand for gold in the first quarter of 2020 was 753 tonnes, down from 1,019 tonnes in the first quarter of last year, according to data released on Thursday by Refinitiv Metals Research.

This was the lowest quarterly demand in 11 years and was driven by the novel coronavirus pandemic causing jewelry and bar and coin investment to fall off a cliff.

At the same time, the coronavirus helped boost flows into investment products such as exchange-traded funds (ETFs), which jumped 300 tonnes in the first quarter, taking the total holdings to a record high above 3,000 tonnes, according to Refinitiv.

The price action suggests that gold is being driven by investor interest and its traditional role as a safe haven in times of economic uncertainty, according to Reuters.

So far, this has been enough to outweigh the loss of physical demand in the two biggest buyers, but the question is whether this situation is likely to persist, or whether the lack of physical demand will act as a drag on the rally.

Ultimately, if physical demand remains weak in China and India, it would be hard to mount a case for a sustained gold rally on the back of investment flows, Reuters said.

Daily Forecast

The early flat trade suggests volatility will return once the ECB makes its monetary policy decision. If the Euro rallies on the news then the U.S. Dollar Index will break. The weaker dollar could drive up foreign demand for dollar-denominated gold. However, gains could be capped if stocks continue to rally and demand for risky assets is sustained.

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