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Gold Weekly: As virus fears spread, gold remains the market’s favoured facemask

Market Analysis /
Stephen Innes / 24 Feb 2020

AxiTrader Gold Weekly

Covid 19 galvanizes gold's rally wings into action

When you find your sell trying to put a square peg in a round hole and trying to decide if the market is "risk-on or risk-off", and when USDJPY shoots to the moon while gold is reaching for the stars, there's a regime change afoot. And with few quality assets left to hedge into, gold needs to be at the top of the list (Feb 17). If the US economy, which has been doing the heavy lifting for global growth the past few years, starts to sniffle, gold will go ballistic (Feb 18).

Gold remains, by far, the market’s preferred virus facemask as Yen loses its reliability as a risk-off trade when the exogenic shock comes from China.

Gold vs. USDJPY 90 day rolling correlation shifts.

Gold put in a wicked rally as risk sentiment turned frighteningly nervous amid reports of more COVID-19 virus cases outside China, notably in Korea and Japan. Gold received additional support from the weakness in the USD with both the JPY and EUR regaining some recently lost ground, which occurred despite Japan's flash February PMI Manufacturing slipping to 47.6 from 48.8 in January.

Equity market weakness in Asia, which migrated into Europe, was a plus for gold. And US action triggered further gains as weak US economic data buoyed gold. The USD dropped sharply after the IHS Markit flash services sector Purchasing Managers Index fell to 49.4 this month, down from 53.4 in January and the lowest level since October 2013. A reading below 50 shows economic contraction.

The heavily EURO-weighted DXY Index fell to 99.22 from 99.85 previously while yields also dropped; the yield on the US 30-year Treasury fell to a record low of 1.88%, from 1.97% prior, as equities slipped precipitously on programmed selling. In this fear-stressed, toxic-for-risk atmosphere, gold surged rapidly higher.

Gold notched its best weekly gain in nearly two months, and with global stock markets in retreat and bond yields tanking it was reaching for the stars. With the USD taking a knock, gold could go higher and investors may seek additional hedges, if global equity markets continue to retreat and should the worry over the virus impact disrupt financial markets.

News direct from US corporates about supply-chain disruptions impacting revenue has weighed. After Apple’s downgrade on Wednesday, Procter and Gamble warned Thursday about lower Q1 sales and earnings, citing supply chains and reduced store traffic in China. These profit warnings were a boon for gold as once the earnings cycle starts to saturate or fall, money tends to find safe assets such as gold.

Gold vs. SPX

Yields have fallen sharply, but even the deep and liquid US Treasury markets will not absorb all risk-off related buying coming into the market, mainly as capital flows out of equities. Gold will be a prime beneficiary given its broader acceptance now as a quality asset after last year's Central Bank buying splurge.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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