3 Reasons Why Gold Prices May Rise Further In Near Term

Following the increase in coronavirus cases outside China, there has been a significant shift in the movement of investments from equity to safer assets like gold.

On Friday, gold futures on MCX rose as much as 0.5 percent to $42,747 per 10 grams. In the international market, spot gold was trading above $1,640 an ounce.

Earlier this week, gold prices in India touched an all-time high of Rs 43,788 per 10 grams in the futures market. Spot gold crossed $1,600 for the first time since 2013.

Goldman Sachs Group Inc recently in its note said that the brokerage sees gold hitting $1,800 an ounce, while analysts at Citi have forecasted the metal to top $2,000 an ounce in the next 12 to 24 months.

Here are 3 reasons why this trend may continue, however, the gains may be capped by profit booking and strength in the US dollar.

1. Govt-spending on crisis management

For the first time since the outbreak, the number of officially reported cases around the world have surpassed those in China. On Thursday, the World Health Organisation (WHO) said 459 new cases had been reported by 37 countries in 24 hours, compared with 412 by China. The total number of infections is now over 81,000 and over 2,700 have been reported dead from the disease.

First time cases were reported in Brazil, Denmark and New Zealand this week.

Moody's Analytics has doubled the odds of coronavirus turning into a pandemic to 40 percent.

As infection spreads, countries have been preparing to combat the disease with Malaysia and Hong Kong announcing stimulus packages to its residents. Governments will also have to spend a considerable amount to ensure adequate medical supplies and personnel to detect and treat those infected.

With more incentives being expected to be announced, policy interest rates are likely to be cut by central banks.

2. Fall in economic activity amid panic

Operations have been shut at many Chinese factories for several weeks. This week, Hyundai Motors shut one of its factories in South Korea after a worker was tested positive for the virus.

Restrictions have been increasingly imposed on air travel by many major countries, including India, where visa on arrival services for nationals of Japan and South Korea were temporarily suspended to contain the spread of the virus.

Economists at Citi said earlier this week that the spread of fear of the virus is faster than the spread of the virus itself. The brokerage also said consumption is declining as human contact is being minimized to control the spread of infection along with the closure of stores, factories due to lack of supplies or other related reasons.

A fall in demand will hurt economic growth and corporate earnings.

The recovery of the fragile global economy, that had only started coming out of the negative effects of US-China trade war, is likely to derail as hopes of the epidemic coming to end seem to have been shattered.

In fact, the economic effects of the coronavirus scare will be greater than the US-China trade spat. The trade dispute caused over 20 percent increase in gold prices in 2019.

3. Higher expectations of interest rate cuts

Apart from the need for funds to aid shutdowns to combat, major central banks of the world may cut interest rates to cushion the effects of an economic slowdown.

The US Federal Reserve is now expected to cut its rates as early as next month amid low inflation and rapid spread in virus cases.

Traders of futures contracts tied to the US central bank's policy rate are already betting on it.

On Thursday they were pricing in about a 76 percent chance of the Fed starting to cut rates as soon as next month and trimming an extraordinary three-fourths of a percentage point by September, according to CME Group's FedWatch.

Lower interest rates, especially those of the US central bank, reduce the opportunity cost of holding non-yielding gold, increasing the appeal of the metal among traders.

However, European Central Bank President Christine Lagarde said on Thursday that she would need to see a "long-lasting" shock to act and that it has "certainly" not gotten to that point yet. In South Korea, the central bank surprisingly kept rates unchanged despite a surge in infections in the country.

But experts believe that the Fed still has some room to cut interest rates, unlike other central banks.