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James Hyerczyk

Gold futures are trading higher on Tuesday as investors continue to buy the precious metal as a potential hedge against a sell-off in the global equity markets due to rising concerns over the impact of the coronavirus outbreak on the global economy.

The market has now gained back more than 50% of last week’s plunge, which was triggered when the Chinese stock market was saved from a crash by timely economic stimulus from the People’s Bank of China.

At 08:34 GMT, April Comex gold is trading $1577.50, up $4.10 or +0.26%.

Today’s early market strength comes as a bit of a surprise with demand for risk edging higher as well as the U.S. Dollar, two moves which tend to weigh on gold prices. Furthermore, on Friday, the U.S. government released a report showing upbeat job market data. Additionally, on Monday, China’s January producer and consumer prices came in better than anticipated. Both pieces of positive economic news failed to rattle gold buyers very much.

Uncertainty Surrounds Coronavirus Outbreak

“There’s still a great deal of uncertainty around the (virus) impact and we’re seeing rising deaths and infections. The economic impacts are still unclear. If that’s the case, we’ll continue seeing reasonable support for gold,” said Michael McCarthy, chief market strategist at CMC Markets.

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Fed Reveals U.S. Economy Slowed

A “moderately” expanding U.S. economy was slowed last year by a manufacturing slump and weak global growth, but key risks have receded and the likelihood of recession has declined, the U.S. Federal Reserve said in its latest monetary policy report to the U.S. Congress.

“Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing and financial conditions eased,” the Fed said on Friday, noting that the U.S. job market and consumer spending remained strong.

“The likelihood of a recession occurring over the next year has fallen noticeably in recent months,” the Fed said, basing its conclusion on models of recession probabilities that incorporate the behavior of bond markets and other factors.

Among the risks the Fed did note:  the fallout from the spreading outbreak of coronavirus in China, “elevated” asset values, and near-record levels of low-grade corporate debt that the Fed fears cold become a problem in an economic downturn.

Daily Forecast

So far in 2020 we’ve seen two spikes in gold prices that ended with thuds. But this rally seems a little different. It’s a little more orderly, which could be a sign of professional buying.

The public doesn’t seem to be interested too much in the rally, which is fine. They may not understand that gold could rally at the same time the dollar and stocks move higher.

With the professionals probably coming in on last week’s dip into support, look for the public to latch on to this market once they see a headline that they understand. That could launch another spike to the upside, but by then, the professionals will be selling into the speculative buying.

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