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Gold bulls likely buying at a discount, targetting for 1600 psychological level

  • Gold is holding in bullish territories despite strength in US dollar and data.
  • Down on the day, but bullish fundamentals underpin an upside bias.

Gold is suffering a slight blow in the bull's quest for the $1,600s at the start of this week, despite an underbelly of uncertainty surrounding global trade, central banks and the coronavirus - which still has the potential to be the Back Swan of 2020 – god forbid. Gold is currently trading at $1,577 having travelled from a high of $1,593 to a low of $1,569.98. 

Following the plunge in Chinese equities yesterday (the CSI 300 closed 7.9% lower after not trading since January 23), US and European equities squeezed out small gains overnight which helped to halt the bulls in their tracks. However, after a significant drop on Friday, the US dollar has also been better bid gain, despite US 10-year yields still within bearish territories.

The US manufacturing survey data arrived a lot hotter than expected and the greenback extended gains after ISM Manufacturing PMI beat with 50.9, way above 48.5 expected and putting the industrial sector back into the green. DXY has been as high as 97.89 from a low of 97.37 and the 10-year is at 1.5360% but had spiked earlier in the session to a high of 1.5760%.

However, the survey data preceded the emergency measures that have been implemented to contain the novel coronavirus both in China and internationally. The demand implications, therefore, will not be known for some weeks yet. Meanwhile, at the time of writing, the S&P 500 was up 0.9% for the day and that is likely to keep gold under pressure into the Asian session. 

A firm case for bullish gold, still 

Mind you, analysts at TD Securities raise a valid point: " A reversal of safe-haven flows is weighing on prices, but we reiterate that the structural bid in the yellow metal is ultimately independent of equity market flows and the continued strength in the USD — a prevalent months-long theme which has failed to derail gold's bull market".

"The gold trade is one associated with loss-aversion — market participants should keep note that the most recent hiccup in the reflation trade has prompted the global negative-yielding debt pile to grow by more than $2.5T in the last two weeks," analysts at TD Securities explained, who suggest that this should serve as a reminder of the scarcity in safe assets, which increases the market impact of such an event.

With central bankers suppressing real rates across the globe, we argue that investment demand for gold will continue to rise as capital seeks shelter from negative real rates. For the immediate trading sessions, we note CTAs could marginally take profits in silver, but we do not expect any noteworthy flow from algos in the coming sessions. Elsewhere in the complex, we are watching platinum as prices near a range associated with profit taking from trend followers.

Coronavirus news

As for the coronavirus, it was a bit of a blood bath overnight with China returning. Yohay Elam, Senior Editor and Analyst at FXstreet update us on the Coronavirus news as follows:

Coronavirus news: The number of official cases has topped 17,000, and the death toll is around 360. The first death outside China has been reported, and additional airlines have limited flights to the mainland. Testing kits have improved, and medicine used for HIV may help in curing the virus. The worst is probably still ahead. 
Coronavirus market response: Chinese markets have reopened after the New Year's holiday with a sharp downfall, carrying down prices of metals. The People's Bank of China cut interest rates on reverse repos and took other measures to stabilize markets.  

Gold levels

  • Gold Price Analysis: XAU/USD bull-run exhausted in the medium term

 

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