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Price of Gold Fundamental Daily Forecast – Supported by Stimulus, Lower Growth Forecasts, Recession Talk

Gold should continue to catch a bid because a weakening global economy and stimulus tend to be bullish for prices. The market could really start to take off to the upside if the major central banks in the region are forced to make rate cuts they have recently said are unnecessary.
James Hyerczyk

The Comex gold market is closed because of a U.S. bank holiday, but there was news on Monday that could influence gold prices over the near-term. In China, the government announced more stimulus measures to help offset the impact of the coronavirus on the Chinese economy, New Zealand lowered its growth forecast and lower GDP moved Japan closer to recession. All of these events are supportive for gold prices.

China Announces More Stimulus Measures

On Monday, China moved to cut its medium-term lending rate. The decision is expected to pave the way for a reduction in the country’s benchmark interest rate as policymakers sought to ease the damage from the virus outbreak that has seriously disrupted activity.

Emerging market currencies and equities started the week on firm footing as the move is expected to soothe investors’ anxiety around the economic blow from the coronavirus outbreak.

A rebound in the emerging market currencies could put pressure on the U.S. Dollar. A lower U.S. Dollar is good for gold prices because it tends to increase foreign demand for the dollar-denominated asset.

Reuters is also reporting that China is planning targeted tax cuts while increasing government spending, Finance Minister Liu Kun wrote Sunday in China’s Communist Party magazine Qiushi.

The Ministry of Finance said Saturday that it would provide 8 billion yuan in a second round of support for virus prevention and control efforts. As of Friday, all levels of finance ministries in China had allocated 90.15 billion yuan in support, according to the central government.

Economists expect the People’s Bank of China to step up its liquidity measures to ease funding conditions in Chinese money markets to combat downside risks posed by the infection.

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New Zealand Lowers Growth Outlook

New Zealand Prime Minister Jacinda Ardern said her country’s GDP is expected to slow to around 2 percent to 2.5 percent this year, due to the economic effect of the coronavirus epidemic.

Ardern said the forecasts were from the treasury which had previously predicted a GDP growth of 2.2 percent to 2.8 percent. She said the repercussions will be seen in the first two quarters of the year.

“Treasury expect things to return to normal in the second half of 2020,” she told a news conference on Monday.

Although New Zealand has not recorded any cases of coronavirus, its tourism industry is highly dependent on the inflow of Chinese travelers.

Japan Moves Closer to Recession

Japan has suffered its worst quarterly GDP contraction in more than five years, with a tax hike and a deadly typhoon taking a toll on the world’s third-largest economy.

Japan’s gross domestic product (GDP) in the three months to December shrank 1.6 percent from the previous quarter, even before the novel coronavirus outbreak in China hit Japan, according to official data published on Monday.

Economists were braced for a contraction of around one percent but had not expected such a poor figure, with Takeshi Minami, chief economist at Norinchukin Research Institute, saying it was “quite an undershooting”.

Monday’s data snapped four quarters of growth and was the biggest contraction since the second quarter of 2014 when the economy shrank 19 percent.

Economists are now carefully watching to see what impact the new virus will have on the world’s third-largest economy, as it hits Japanese companies’ manufacturing activities and tourism.

Japan has only a “bleak” prospect of returning to growth in the first quarter of this year, said Minami.

Short-Term Outlook

Gold should continue to catch a bid because a weakening global economy and stimulus tend to be bullish for prices. The market could really start to take off to the upside if the major central banks in the region – Reserve Bank of Australia and Reserve Bank of New Zealand – are forced to make rate cuts they have recently said are unnecessary.

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