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Price of Gold Fundamental Daily Forecast – Speculators May Be Betting on Negative Interest Rate Environment

We’re expecting the strong upside bias to continue over the near-term, but we do realize there are going to be pockets of weakness as investors book profits along the way. This rally may turn into a “buy the rumor, sell the fact” situation once the economic data starts to reveal the economic damage the virus is causing.
James Hyerczyk

Gold prices continued their surge on Monday, jumping more than 2.5%, as the spread of coronavirus outside China and its potential impact on global economic growth spurred safe-haven buying into U.S. Treasurys. While notes and bonds went up, yields went down, making gold a more attractive investment.

Traders aren’t buying gold as a safe-haven. They are buying it because it is an investment that will become more valuable if interest rates go negative. Gold doesn’t pay anything to hold it, but getting paid nothing is better than holding a negative-yielding bond.

At 13:29 GMT, April Comex gold is trading $1677.60, up $28.80 or +1.75%.

Central Bank Action is the Key

Gold buyers are essentially betting on the major central banks taking steps to protect their respective economies through lower interest rates or quantitative easing. This will weaken paper money and make hard assets more attractive.

At this time, traders are looking for Japan, Australia and New Zealand to make a move on rates sooner rather than later. Japan appears to be headed for recession, while the Reserve Banks of Australia and New Zealand (RBA and RBNZ) are putting up a good fight to avoid slashing again since their benchmark rates are so close to zero percent. The performances in the Australian and New Zealand Dollars indicate that investors are expecting some sort of stimulus, but so far policymakers are sitting tight while watching for signs of economic weakness.

On Monday, Euro Zone money markets priced in around a 50% chance that the European Central Bank will cut interest rates by 10 basis points in July, in a sign of increased concern that the spread of coronavirus will hit the Euro Zone economy hard.

Wall Street expects the Federal Reserve to cut interest rates. According to the CME Group, traders envision a roughly 58% likelihood of at least one rate cut by June – up from less than 20% a month ago. However, last week, Chairman Jerome Powell reiterated that the Fed thinks the economy is in solid shape.

Also last week, Federal Reserve Vice Chairman Richard Clarida was upbeat about the state of the U.S. economy, and he said the central bank was closely watching to see if the U.S. is affected by the coronavirus outbreak.

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Daily Forecast

We’re expecting the strong upside bias to continue over the near-term, but we do realize there are going to be pockets of weakness as investors book profits along the way. This rally may turn into a “buy the rumor, sell the fact” situation once the economic data starts to reveal the economic damage the virus is causing.

Choppiness will return to the market once economists and government officials start issuing forecasts and assessments of the situation.

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