The prices of gold declined on Monday as the People’s Bank of China (PBOC) attempts to reduce the negative economic impact of the coronavirus outbreak by injecting liquidity into markets.
U.S. gold futures went down by 0.2% to $1,584.70 an ounce while spot gold prices dropped by 0.6% to $1,580.48 as of 0407 GMT.
The outbreak has weakened the commodities market, the oil sector and the Asian equities market on the very first trading day after the Chinese New Year holidays. Investors were concerned that the epidemic would lower the market demand in China. The 2019-nCoV has already claimed the lives of 361 people.
The Chinese government has promised to use monetary policy instruments to support affected companies and ensure sufficient market liquidity. The PBOC did so by injecting liquidity worth 1.2 trillion yuan into markets by cutting reverse repo rates. The central bank lowered the 14-day tenor to 2.55% and the seven-day reverse repo rate to 2.40%.
According to AxiCorp chief market strategist Stephen Innes, the PBOC’s move to backstop the economic impact of the coronavirus virus outbreak is pushing the prices of the yellow metal down. He also said that when the effect of the PBOC’s “band-aid” solution fades, the reality of an economic turmoil in China will set in. This is very likely given that half of China has been shut down this week and this could significantly reduce production and consumption. He also expects this economic tumult to spread outside China and force most central banks to implement interest rate cuts.
The factory activity in China has already slowed down in January. But analysts believe that the figures still did not reflect the impact of the outbreak and industrial production growth could worsen in the next few months.
Another factor currently affecting the precious is the stronger U.S. dollar which makes the bullion more expensive for investors using other currencies.
Meanwhile, the holdings of SPDR Gold Trust, the largest gold-backed exchange-traded fund in the world, dropped by 0.03% to 903.21 tons. Data also showed that market speculators have reduced their bullish stance in COMEX gold contracts for the week which ended on January 28, 2020.