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Gold Prices Drop Despite Coronavirus Scare, ECB in Focus

Gold Prices Drop Despite Coronavirus Scare, ECB in Focus

2020-03-12 06:00:00
Ilya Spivak, Head Strategist, APAC


  • Gold prices continue to drop despite stock market turmoil
  • Crude oil prices mark time, ignore EIA inventories report
  • ECB policy announcement eyed, Lagarde presser in focus

Gold prices fell for second consecutive day despite ongoing bloodletting across global financial markets. That it lost ground despite the bellwether S&P 500 stock sinking to the lowest level calls into question its frequent characterization as a “safe haven” asset (which I have strenuously argued against).

The metal probably earned its “safety” pedigree incidentally. It offers no yield, and so tends to look comparatively more attractive when interest rates decline. Since this tends to happen as bond prices rise when haven-seeking capital flows boost demand for government debt, it often gains in risk-off conditions.

When scope for speculation on ever-lower lending rates runs out, this relationship seems to break down regardless of whether market turmoil continues or not. This appears to be precisely what is happening at present: markets have already priced in Fed rates returning to 0, undermining gold’s capacity for gains.

Crude oil prices edged lower amid broader risk-off trade, but found little momentum to venture beyond the narrow consolidation range established since the dramatic plunge at the start of the week. EIA data showing US inventories added a hefty 7.66 million barrels last week passed unnoticed.


The spotlight now turns to the ECB monetary policy announcement. Markets are primed for a 10bps deposit rate cut to -0.4 percent. Increasing the size of QE asset purchases and introducing another round of TLTRO liquidity injections seems to be widely expected as well.

Big-splash monetary stimulus measures from the Feb, the Bank of Canada and the Bank of England amid the coronavirus outbreak have been met with a cool reception. This probably reflects their meeting rather than exceeding investors’ priced in outlook. A similar fate likely faces the ECB’s support package.

With that in mind, comments from ECB President Christine Lagarde at the press conference following the policy announcement may take on particular importance. She will have the unenviable task of convincing markets the central bank has enough firepower to counter the outbreak’s economic impact.

That is no easy feat considering the ECB has demonstrably launched a comprehensive review of its mandate at the beginning of the year, echoing broader concerns about the efficacy of monetary policy when conventional rate cuts are exhausted. Another selloff may follow if Lagarde fails to mollify markets.

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Gold prices are edging toward resistance-turned-support at 1611.34, the January 8 high. A daily close below that opens the door for a challenge of the 1535.03-57.10 zone. A further push lower beyond that would mark a break of the uptrend carved out since late April 2019. Closing above the February 24 high at 1689.30 seems like a prerequisite to neutralize selling pressure.

Gold Prices Drop Despite Coronavirus Scare, ECB in Focus

Gold price chart created using TradingView


Crude oil prices are marking time below support-turned resistance at 34.86, the 61.8% Fibonacci expansion. Pushing above that exposes a handful of minor back-to-back barriers but a return to $50/bbl seems necessary to defuse the near-term bearish bias.

Immediate support is at 31.11, the 78.6% expansion. A break below that with confirmation on a daily closing basis seems likely to open the door for a test of the 26.05-33 zone, marked by the 100% Fib and a swing bottom dating back to February 2016.

Gold Prices Drop Despite Coronavirus Scare, ECB in Focus

Crude oil price chart created using TradingView

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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