Gold rose by more than 2% to above $1,635 per ounce as the Fed unexpectedly lowered its interest rate by 0.5% at a special meeting due to the spread of the coronavirus.
According to analysts from Bank of America, ING, and Goldman Sachs, the reduction of interest rates by the Fed in March is just the beginning. It is expected that the ECB can ease interest rates by 0.2% and BoE - by 0.5%.
In theory, low interest rates are beneficial for gold as it can attract investors who are looking for revenue not only in dollars but other assets. However, many investors are waiting for gold to reach record highs which have been achieved over the past few months. That is why competition for capital is likely to be tough.
New wave of increased demand for risk assets can become another reason for gold to fall in price. In this case, capital can be accumulated in assets such as shares (to the detriment of gold).
Anyway, the fundamental factors of the gold market remain quite strong and any short-term corrections are likely to be insignificant.
The pullback of gold was not as important as the collapse of the US stock market by more than 10%. Thus, gold proved its safe haven asset function.
Experts from RBC Wealth Management expect gold to rise further. However, amid the spread of the coronavirus, the price of gold can unexpectedly decline or start rising again. In such a case, we can talk abou volatility.
Traders see gold as a trading instrument but pay attention to shares. Anyway, many traders want to buy the safe haven asset at lower prices for long-term retention.
At the beginning of 2020, events like no deal Brexit and trade tension between the US and China, which happened in 2019, took a back seat. However, the difficult situation in the Middle East, the coronavirus epidemic, and uncertainty amid the US presidential elections are likely to restrain investors and boost safe haven assets in 2020.
In 2019, gold advanced more than any other safe haven asset - by more than 15%.
This year, gold is expected to become a leader in growth as central banks continue to ease monetary policy while concerns about the global recession are likely to increase.
