Gold prices are trading steady to lower shortly after the New York opening on Thursday as a spike in coronavirus cases dented demand for riskier assets, sending investors into the safe-haven U.S. Dollar. The protective move is weighing on demand for dollar-denominated gold.
Global equity prices fell to their lowest level in over a week, as a surge in COVID-19 cases and a warning from the International Monetary Fund (IMF) of a nearly 5% plunge in the global economy this year hit the bulls again.
At 12:43 GMT, August Comex gold is trading $1768.50, down $6.60 or -0.37%.
Re-Emergence of COVID-19 Risks Favor the Dollar
While the weakness in demand for equities is usually viewed as favorable for gold during normal times, this has not been the case since March. Gold and stocks have spent most of the time moving nearly lockstep and the COVID-19 pandemic has caused investors to throw traditional price relationships out the window.
Instead of gold demand dropping when stocks rise, it’s the U.S. Dollar that has been taking the hit, making gold more attractive. And when stocks have been falling, investors have moved money into the U.S. Dollar for protection, making gold the less-desirable investment.
Safe-Haven Demand for US Dollar
The U.S. Dollar held firm on Thursday as rising trade tensions coupled with fears of a second wave of coronavirus fueled demand for the safe-haven currency.
The surge in COVID-19 infections has kept investors on tenterhooks with Australia and three U.S. states reporting a spike in cases, as well as in Brazil, Latin America and India, the world’s second biggest bullion consumer.
We expect the stock market, gold and U.S. Dollar relationship to continue throughout the session on Thursday. If stocks continue to fall then investors will move money into the U.S. Dollar. The stronger dollar will weigh on gold prices.
Over the short-run, this could be bearish for gold prices, however, due to the bullish longer-term outlook for gold because of the excessive fiscal and monetary stimulus, investors are reading short-term weakness as a buying opportunity.
“The fact that gold has come under slight pressure nonetheless could be a sign of renewed forced selling to generate liquidity, as has often happened during phases of risk aversion in the past three months,” Commerzbank said in a note.
“What is more, it is noticeable that falls in the gold price are still being viewed by investors as buying opportunities…we therefore regard the latest weakness in the gold price as temporary and envisage new highs in the near future.”
We tend to agree with Commerzbank’s assessment of gold. Investors are still in the “buy the dip” mode which should be long-term supportive, especially if governments and central banks come up with additional stimulus packages.