Gold is trading flat like the safe-haven Japanese Yen and Treasurys on Friday as investors assessed the risks to the global economy from the coronavirus epidemic. The market is being underpinned by reports that economists are scaling back growth expectations for the world’s second-largest economy as they assess the impact of the outbreak.
At 11:39 GMT, April Comex gold futures are trading $1578.80, unchanged.
Global Economic Slowdown Will Be Bullish
Bullish traders are supporting the market because they feel a slowdown in China’s economy will eventually spread to its trading partners, which could encourage a few of the major central banks like the Reserve Bank of Australia and the Reserve Bank of New Zealand to ease monetary policy further. Both central banks said recently that they are currently monitoring the potential impact of the outbreak on their respective economies, but it’s too early to tell what the damage will be.
On Tuesday, Federal Reserve Chairman Jerome Powell also said the central bank is monitoring the situation and will have data on the impact soon.
Are Investors Underestimating the Economic Impact of the Virus?
Some analysts feel that investors are being lulled into thinking “all is well” especially since the global equity markets are hovering near record highs.
“The economic impact of the measures taken by (China) should not be underestimate; the workers are returning very slowly to their factories, supply chains are probably disrupted … we see quite a drag on the Chinese growth in the first quarter,” said Julies Baer analyst Carsten Menke.
Another suggests investors may be wrongly drawing conclusions based on the performance of China’s economy after the SARS virus.
“I think markets are looking at the playbook of SARS and what we found there was, it was a big hit … to growth in the countries that were most affected but it was a V-shaped recovery,” Rob Subbaraman, head of global macro research at Nomura, told CNBC’s “Street Signs” on Friday. A V-shaped recovery describes downturns that see a steep fall before recovering sharply.
“What we think markets might be missing is the depth of the V could be worse than people think,” Subbaraman cautioned. “The economic data we start getting for February could be a lot worse than people think.”
Since the outbreak began, gold has posted a range of $1598.50 to $1551.10. The mid-point of this range is $1574.80. This is our bogie.
Holding above $1574.80 will indicate traders are developing an upside bias. In other words, they are increasing protection against a worsening of the crisis. A move below this level will suggest that tensions are easing.
With the current price at $1578.80, we have to conclude that investors are taking on a little more protection ahead of the weekend.
This article was originally posted on FX Empire
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