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Gold Nears 7-Year Highs on Coronavirus Impact; Stocks to Slide Next?

Gold Nears 7-Year Highs on Coronavirus Impact; Stocks to Slide Next?

2020-02-18 18:17:00
Rich Dvorak, Analyst
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GOLD FORECAST: GOLD PRICE ACTION APPROACHES $1,600/OZ AS CORONAVIRUS FEARS BOLSTERS BULLION

  • Spot gold eclipses $1,600/oz for the second time this year with XAU/USD trading at its highest level since April 2013
  • Gold has potential to extend its advance as risk-aversion perpetuates alongside concerns over the spread of the novel coronavirus
  • Sustained demand for safe-haven assets such as gold could precede a larger pullback in the S&P 500 Index as downward revisions to global GDP growth and earnings loom over stocks

Gold is set for its biggest gain of 2020 following this morning’s spike above the $1,600 price level, which brings the commodity on pace for a 5% year-to-date gain. The price of gold has gained considerably over the two or so months in light of surging liquidity provided by central banks and lingering demand for bullion given its anti-risk properties.

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Despite the latest stretch higher, spot gold (XAU/USD) has potential to continue pressing onward toward the 2012 swing highs near $1,800/oz if the precious metal can maintain its footing above the $1,600 mark, which could be facilitated by lingering demand for safe-haven assets like bullion.

GOLD PRICE CHART: MONTHLY TIME FRAME (APRIL 2009 TO FEBRUARY 2020)

Gold Price Chart Gold Forecast

Chart created by @RichDvorakFX with TradingView

Earlier this year, the outbreak of a novel coronavirus in Wuhan, China blindsided investors who largely expected a modest rebound in global GDP growth.

Market participants who grew optimistic on the back of a phase one trade deal between the United States and China signed last December are now left guessing whether or not their upbeat outlook will materialize as the coronavirus paralyzes the world’s second largest economy.

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Businesses and economic activity came to a screeching halt across China with much of the country and its citizens on lockdown to prevent the spread of the coronavirus.

Correspondingly, traders are growing more pessimistic as global GDP growth forecasts are revised lower to reflect a nosedive is manufacturing, travel and consumer spending as well as the adverse shock to global supply chains.

GOLD PRICE CHART & GOLD VOLATILITY: DAILY TIME FRAME (FEBRUARY 2019 TO FEBRUARY 2020)

Gold Price Chart Forecast Coronavirus Spurs Volatility

Chart created by @RichDvorakFX with TradingView

In fact, the South China Morning Post recently reported that a Chinese government policy adviser stated that China may adjust its 2020 GDP growth target due to the unnerving coronavirus impact on its economy.

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

Specifically, the tabloid referenced that China GDP growth could slow to 3% for the first quarter and 5% for the year, which compares to the currently expected 6% growth rate for 2020 according to a recent update to the IMF World Economic Outlook.

STOCKS IN THE S&P 500 INDEX MAY FALL AS GOLD PRICES CONTINUE TO RISE AMID DOWNARD REVISIONS TO GLOBAL GDP GROWTH & EARNINGS ESTIMATES

Chart of Gold to S&P 500 Index Ratio

Chart created by @RichDvorakFX with TradingView

That said, spot gold prices may continue to edge higher with measures of volatility perking up as downward revisions to global GDP likely loom large over trader sentiment.

At the same time, gold could potentially outperform the S&P 500 Index if the equity benchmark comes under serious selling pressure as earnings estimates are slashed considering stocks are trading near record highs with historically stretched valuations on balance.

On that note, Apple Inc (AAPL), which is the largest component of the S&P 500 Index, announced yesterday that it does not expect to meet revenue guidance this quarter.

Keep Reading: Crude Oil Price Outlook Mired by Coronavirus, Global GDP Growth

-- 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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