Gold benefits from rate-cut talk

Bengaluru — Gold rose more than 1.5% on Monday, recovering from its biggest one-day decline in nearly seven years, on the potential for interest rate cuts by the US Federal Reserve to soften the economic effect from the coronavirus outbreak.

Spot gold was up 1.5% at $1,608.13/oz at 10.50am GMT and US gold futures rose 2.7% to $1,609.60.

Amid a broad sell-off across global markets on Friday, gold plunged by more than 4.5% for its biggest daily decline since June 2013 as investors liquidated positions to meet margin calls in other assets.

“The major price slump at the end of last week was overdone. The situation remains in and around coronavirus causing insecurity in the markets … so gold prices are rising,” said Commerzbank analyst Eugen Weinberg.

Fed chair Jerome Powell on Friday said the US central bank will “act as appropriate” to support the economy in the face of risks posed by the coronavirus epidemic.

The market expects about three interest rate cuts in 2020, which is why the dollar is under so much pressure, Weinberg said.

Futures now imply a 50 basis point rate cut at the Fed’s March 18 monetary policy meeting.

Lower interest rates reduce the opportunity cost of holding nonyielding bullion and also weigh on US yields and the dollar, in which gold is priced.

Stephen Innes, chief market strategist at financial services firm AxiCorp, said the negative correlation between the US currency and gold has reappeared since the dollar’s safe-haven appeal has faded.

The dollar index was on the back foot, while benchmark US 10-year treasury yields fell to a record low.

Lower treasury yields continue to underpin pricing across precious metals, though the market remains nervous after last week’s sharp declines, said trading services group MKS PAMP.

“Expect strong downside interest to remain through $1,570 — $1,550, with the $1,550 pivot level the key for near-term price direction,” it said.

Other precious metals also rebounded from Friday’s sharp sell-off.

Palladium rose 2.4% to $2,656.55/oz, having plunged as much as 13% on Friday for its biggest one-day decline since the 2008 financial crisis.

Platinum gained 1.1% to $872.64 and silver rose 1.6% to $16.92 after both fell to their lowest in about six months in the previous session.

Reuters