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James Hyerczyk

Gold futures are trading higher on Thursday, but well-off their high of the session. Fear over the coronavirus’ impact on China’s economy is helping to underpin the market, while stronger-than-expected U.S. economic data is helping to put a lid on prices today. Traders are being primarily guided by falling U.S. Treasury yields and lower demand for risky assets.

At 13:49 GMT, April Comex gold is trading $1584.00, up $8.00 or +0.52%.

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Coronavirus’ Effect on China’s Economy

On Wednesday, a Chinese government economist projected the outbreak would cut China’s first-quarter growth by one percentage-point to 5% or lower, possibly pushing policymakers into introducing more stimulus measures.

The fast-spreading outbreak, which has killed more than 130 people and infected almost 6,000 in China, could cut first-quarter GDP growth by about 1 percentage point, Caijing magazine quoted Zhang Ming as saying.

“GDP growth in the first quarter of 2020 could be about 5.0%, and we cannot rule out the possibility of falling below 5.0%,” Zhang said.

Zhang, an economist at the Chinese Academy of Social Sciences – a top government think tank – said his forecast was based on the assumption that the outbreak will peak in early to mid-February and end by the end of March.

China’s growth slowed to a near 30-year low of 6% in the fourth quarter, and analysts have said they expect the epidemic to drag on the economy.

Zhang estimated its impact on China’s economy could be significantly bigger than that of Severe Acute Respiratory Syndrome (SARS), a coronavirus that originated in China and killed nearly 800 people globally in 2002 and 2003.

Domestically, the outbreak has hit sectors including transportation, tourism, catering and entertainment. Zhang said it could weigh on jobs, with the official survey-based unemployment rate likely to exceed 5.3% in the coming months, Zhang said.

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Central Bank, Government Stimulus May Be Coming

In response, the government is likely to step up policy support, which could boost the annual budget deficit as a share of GDP to over 3% in 2020, he said. The People’s Bank of China could further cut banks’ reserve requirement ratios and interest rates, Zhang added.

Economic growth could recover later this year, bringing the full-year expansion to 5.7%, Zhang said. In 2019 growth was 6.1%, the weakest in 29 years.

Daily Forecast

Any talk of further easing by a central bank or government stimulus tends to be supportive for gold. So a worsening virus outbreak will weaken the economy further, bringing the government closer to more stimulus. This should underpin prices over the near-term.

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