Gold better bid, savvy investors taking heed of elephant in the room

Despite the flurry to the equities on the back of progress with the phase-one trade agreement between the US and China, gold prices are also on the up. At the time of writing, gold trades at $1,565 having travelled from a low of $1,552.67 to a high of $1,568.21.

Investors cheered the news that China said it would slash tariffs on $75 billion of US imports in half as part of its efforts to implement a recently signed trade agreement with Washington. Beginning Feb. 14th, China will cut tariffs on some US goods to 5% from 10%, while levies on some other items will be reduced to 2.5% from 5%, China’s Ministry of Finance said Thursday. 

Not so fast

However, while we are in a familiar risk-on environment, where equities are taking on fresh highs, there remains an underbelly of concern for the overall state of the global economy, despite some pretty upbeat tones from around the central bank complex. 

So far this year, we have hard from the Federal Reserve, Bank of England, the European Central Bank and the Reserve Bank of Australia. There was something for everyone in all of these meetings, but there were some hawkish surprises which have underpinned a complacent tone in the equities space.

In fact, there seems to be some over-excitement from the hawks, relative to what the bond markets are telling us, at least. Indeed, while some of the data of late has been on the more positive side, markets are somewhat too favourable to them and should be reminded that there is still plenty of work to do.

Taking the latest European data, for example. eurozone Gross Domestic Produce growth fell to a snail’s pace in the fourth quarter and core inflation dropped back in January. The end of last mont's result in GDP fell to 0.1% for the fourth quarter – a chilling reminder for markets that eurozone is still well off from a recovery. ECB’s Lagarde acknowledged that they have little firepower remaining in the event of an economic downturn. If we look elsewhere, the backdrop is familiar.

Coronavirus, what is there to be complacent about? 

The contagion from China's forecasted drop in GDP is yet to be seen and fully factored in. Moreover, W.H.O. reported about 3,700 new cases on Wednesday, a slight dip from the figure reported on Tuesday. Despite the decline, “it’s right now too early to make predictions” about the course of the epidemic, said Dr. Michael Ryan, executive director of W.H.O.’s Health Emergencies Program. He warned that China is “still in the middle of a very intense outbreak, and we need to be careful.” “Nearly 3,700 new cases of coronavirus in a single day is nothing to celebrate,” he added.

• China: Coronavirus will infect the Chinese economy – Nordea

Should there be a recovery throughout the G10s, it is like to be a subdued and long-drawn-out process throughout 2020/21. A day in the markets is a long time, let along the entire year, so there are plenty of likely obstacles in geopolitics as well as the coronavirus to ensure that asset classes such as gold will attract demand.   

Low rates environment keeping gold underpinned

Today, gold futures indeed remained buoyant for another session. Since rates are so low, gold is more attractive and until there is an absolute sense that the coronavirus will be contained and that global trade is on track, investors are likely to park idle cash in asset classes like gold for their safe-haven appeal. 

"We reiterate that while the gold trade may be crowded, suggesting range-bound trading will continue to be the norm, for the time being, we expect that the structural growth in investment demand for the yellow metal, along with continuing suppression of real rates across the globe will keep the gold bug alive in 2020." analysts at TD Securities explained.

"On the CTA front, we do not expect any noteworthy flow from trend-following algos, but CTAs are set to add back a small portion of silver length that had been liquidated in recent weeks."

Gold levels