Market Overview

4 March 2020

Gold is Still Playing the Role of the Safe Haven Asset

Gold price movements might look paradoxically lately if the bullion is considered as a traditional safe heaven asset. The "first wave" of the coronavirus in mainland China in early February triggered the surge in gold prices to almost $1700 toz by February 24. It could be assumed that the recent slump on stock markets could drive the bullion prices even higher to the highs which were reached in 2012 of $1790 toz. But that eventually did not happen.


Gold prices "suddenly" fell from $1692 to $1565 toz last week in line with deteriorating oil prices and the S&P 500 index. The urgent interest rate cut by the US Federal Reserve (Fed) on March 3 by 0.5 percent points in one go in order to mitigate virus risks to the American economy caused gold prices to go up to $1653 toz.


Does that mean that gold lost its role as a safe haven asset and became a risky one? If this is so, how can its further price movements be assessed?


However, the reason for such "unexpected" fluctuations in gold prices has a different nature. The sharp drop in shares' prices and commodities on February 28 was the biggest since 2008 and many investors received margin calls. So, gold contracts were sold in order to replenish investors' deposits and to cover losses caused by the plummeting stock market. Gold, in this regard, did play the role of the safety asset.


The surge in gold prices after the Fed's interest rates cut weakened the US Dollar and pressured gold prices up against it. The strong upward trend in gold prices started in December 2019 and it is still in place. This is confirming the role of gold as a safe haven asset amid continuous trade tensions, fears of a global recession and the further spreading of the coronavirus and the slowing down of the world economy.


The persisting upward trend in gold prices may drag the bullion to the recent local highs of $1660-1680 toz. In an alternative scenario, gold may perform a technical correction to $1590-1600 toz after the strong momentum it gained on Tuesday.


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