Gold is on the rise, and Citi analysts say it could soon surpass levels last seen in 2013.
Gold has been on the rise since the start of 2020, and is currently up nearly 6% year-to-date.
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The precious metal surged above $1,600 at the beginning of February for the first time since 2013 as investors flocked to the safe-haven asset amid the spreading of the coronavirus outbreak.
“Gold is trading near a seven-year high as coronavirus fears continue to drive investors towards the historically safe-haven asset,” said Wisdom Tree ETF manager Nitesh Shah.
“Gold is a natural port of call in times of investor anxiety,” Shah added. “Closing above the psychologically important US$1600/oz for the first time in seven years, gold is showing its mettle in times of uncertainty.”
As of Wednesday morning, there were more than 75,200 confirmed cases of COVID-19 and with at least 2,000 deaths.
International Monetary Fund Managing Director Kristalina Georgieva called the coronavirus the global economy’s “most pressing uncertainty,” and said the outbreak will slow China’s growth for 2020, though just how much will depend on how quickly the fast-spreading virus is contained.
“There are a number of scenarios, depending on how quickly the spread of the virus is contained,” Georgieva wrote in a blog post, noting that if the spread of COVID-19 is contained quickly, China’s overall 2020 GDP would be hurt, but only slightly and international spill-over would be minimal.
“However, a long-lasting and more severe outbreak would result in a sharper and more protracted growth slowdown in China. Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China,” she said.
With uncertainty on the rise, Citi analysts said in a note this week that they project gold will hit a seven-year high of $1,700 within the next six to twelve months, and nominal highs of $2,000 in the next 12 to 24 months.
“Gold should perform as a convex macro asset market hedge, resilient during ongoing risk market rallies but a better hedge during sell-offs and vol spikes,” the analysts, led by Ed Morse, wrote in the note.
Morse and his team said that the bullish activity for the shiny yellow metal this year indicates growing concern among investors over not just the coronavirus, but also where we are in the economic cycle as well as ongoing geopolitical concerns regarding the trade relationship between the U.S. and China and the upcoming U.S. presidential elections.
The Citi analysts also noted that the current economic backdrop is supportive of gold since the commodity tends to do well in a low interest rate environment as investors search for yield.
“With short term interest rate markets pricing in ~1.5 Fed cuts in 2020 and global growth risks skewed to the downside, gold is a direct beneficiary of the low nominal and negative real yield environment,” the analysts wrote.
“While negative yields are also supportive for equity markets, gold can further outperform on a risk market unwind should coronavirus risks impact supply chains and thus earnings momentum,” the Citi analysts said.
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