The prices of gold gained by more than 1% on Monday on the rapid spread of the COVID-19 outside China which triggered speculation of an interest rate cut by the U.S. Federal Reserve. The yellow metal lost more than 4.5% last Friday as investors went into a selling mode to meet margin calls in other investments.
U.S. gold futures increased by 2.2% to $1,601.20 an ounce. Spot gold prices rose by 0.9% to $1,599.15 an ounce as of 0401 GMT.
Goldman Sachs said yesterday that it expects the Feds to make aggressive rate cuts noting Chairman Jerome Powell’s release of an unscheduled statement last Friday. The firm predicts a total one percentage point reduction in interest rates. In his statement, Powell said the coronavirus epidemic “posed an evolving risk” to the U.S. economy and they are ready to take the necessary action. The Fed fund futures reveal that the markets are expecting a 75-basis-point rate cut in March.
According to AxiCorp chief market strategist Stephen Innes, a rate cut will have an immediate positive impact on bullion prices. He also noted the decline in the U.S. dollar’s appeal as a safe-haven asset and the revival of its negative correlation with the precious metal.
The expectations for an interest rate reduction has supported other safe-haven assets. The Japanese yen rose to its highest level in four months while the U.S. 10-year Treasury yields fell to a record low.
Meanwhile, the latest data shows that China’s factory activity declined at the fastest rate on record in February. This highlighted the negative impact of the outbreak. In addition, Chinese manufacturers are having a hard time finding enough workers to ramp up their production.
The weak Chinese data and fears of a global recession from the COVID-19 epidemic wiped out $6 trillion off the global equities market. This is the worst stock market rout since the financial crisis of 2008.