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Gold Nears Record High as Yields Collapse & Volatility Rages

Gold Nears Record High as Yields Collapse & Volatility Rages

2020-03-08 05:47:00
Rich Dvorak, Analyst
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GOLD PRICE FORECAST REMAINS BULLISH WHILE THE CORONAVIRUS OUTBREAK ROILS INVESTOR SENTIMENT

  • Gold just printed its highest close since the aftermath of the global financial crisis owing to the coronavirus outbreak and rekindled recession risk
  • Spot gold prices spiked as US Treasury yields plunged following an emergency FOMC interest rate cut that failed to soothe market turmoil
  • The bounce in bullion has potential to extend toward its 2011 record closing price if the stock market rout endures and sky-high volatility lingers much longer

A massive leap in spot gold price action over the last five trading sessions pushed the precious metal up to another fresh year-to-date high and its strongest close since January 2013. The eye-popping 5.5% rally in gold prices last week, propelled by a stunning drop in Treasury yields and pop in volatility, was the largest weekly gain since October 2011. Gold now looks within arms-reach of its record highs near $1,900 per ounce, but can spot prices make it there?

GOLD PRICE GOES PARABOLIC AS TREASURY YIELDS IMPLODE & FED CAPITULATES WITH EMERGENCY RATE CUT

Gold Price Chart Gold Forecast Treasury Yields Fed Rate Cut

Chart created by @RichDvorakFX with TradingView

Investor sentiment and global GDP growth outlook have been battered by the brewing coronavirus pandemic that began in Wuhan, China nearly two months ago. Demand for safe-haven assets has swelled in response, which overwhelmingly caused the recent collapse in sovereign interest rates and jump in gold prices.

Recession risk continues to mount on the back of the novel coronavirus outbreak, or COVID-19, as it delivered a paralyzing shock to the global supply chain and now begins to cripple consumer confidence. The Federal Reserve certainly has taken notice of escalating downside risks faced by the US and global economy due to COVID-19.

This is considering the emergency 50bps rate cut delivered by a unanimous FOMC last Tuesday. It was the first inter-meeting Fed rate cut since August 2008 amid the global financial crisis and collapse of Lehman Brothers.

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With the Federal Reserve looking to reassure panic-struck markets, by making financial conditions more accommodative and capitulating to dovish rate cut bets, traders might force the hand of Fed Chair Powell and the FOMC to ease further at the next scheduled interest rate decision on March 18.

The Fed is expected to lower its policy interest rate target by 63-basis points at its next monetary policy update according to Fed funds futures pricing. There are 88-basis points of Fed interest rate cuts priced in by year-end. This trend of ballooning FOMC rate cut bets, if continued, could catapult gold to record highs notched in August 2011.

Learn More – How to Trade Gold: Top Gold Trading Strategies & Tips

Another monetary policy powerhouse – the European Central Bank – is expected to provide its own interest rate decision this coming Thursday, March 12 at 12:45 GMT. The ECB Governing Council is expected to leave its key interest rates unchanged according to market consensus.

However, as the coronavirus begins to plague Italy and grip the EU, there has been a collapse in Eurozone inflation expectations and notable rise in recession risk. In turn, this may entice dovish ECB guidance and/or action, which likely stands to help gold prices extend higher than they have already.

GOLD PRICE & VOLATILITY SKYROCKET AS RECESSION RISK RETURNS WITH VENGENCE

Gold Price Chart Gold Forecast Volatility Coronavirus Outbreak

Chart created by @RichDvorakFX with TradingView

Coronavirus concerns have grown exponentially over recent weeks as the number of confirmed cases inflates – and the economic toll caused by COVID-19 compounds. Correspondingly, stock market uncertainty has begun to snowball on the back of rekindled recession odds. This is broadly reflected by a meteoric rise in the VIX Index since mid-February.

The VIX Index, which is synonymous with ‘fear-gauge’ on Wall Street, just exploded to its highest close since 2011 last week as stocks crash and measures of volatility go haywire. That said, there is generally a strong direct relationship observable between gold and the VIX Index. Spot gold price action will likely stay supported so long as extremely elevated market volatility lingers and risk appetite remains depressed.

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On that note, the economic calendar for next week shows that the preliminary US consumer sentiment report for March is due Friday the 13th – perhaps ominously – at 14:00 GMT. The monthly survey will look to shed light on how coronavirus fears are impacting the economic health of consumers. As such, the consumer sentiment report has potential to spark a big reaction in the VIX Index and gold prices if the data deviates materially from market consensus.

The median economist estimate for the headline consumer sentiment index is expected to cross the wires at 95. That would be notable drop from the prior period’s print of 101. It would also be the lowest reading since September last year amid turbulent US-China trade war uncertainty.

GOLD TRADERS UNWIND LONG POSITIONS AMID STOCK MARKET SELLOFF & NEED FOR CASH

Spot Gold Price Chart Gold Forecast

One possible headwind that could pressure the price of gold lower is the risk of a massive liquidity crunch and dash for cash. I pointed this out late last month when the gold breakout took a breather despite a massive stock market selloff, spike in volatility and plunge in yields in light of mounting coronavirus concerns – an atypical move considering the typical correlation of these asset classes.

Gold BEARISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% -3% 2%
Weekly 9% -6% 5%
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Forced liquidation to cover equity losses and margin calls issued by brokers, following the sharp slide in stocks from all-time highs, is a probable explanation for the unwind of long gold positions by futures traders over the last two weeks. This was indicated in latest CFTC Commitment of Traders data (COT Report). Nevertheless, potential downside in gold due to this will likely prove short-lived and overshadowed owing to the aforementioned bullish developments.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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