Gold prices hit fresh multi-year highs of $1,635/oz and Silver climbed to $18.60/oz during early European session amid growing concerns for the coronavirus outbreak, the potential for a slowdown in the global economic growth, the lower interest rates and the general risk aversion sentiment in the financial markets.

Gold broke above the $1.610 previews high:
Gold prices have gained more than $180/oz or approximately 12% since December 2019, rising from the $1.450/oz levels traded before the Iran-USA crisis at the end of 2019. The yellow metal price broke above the $1.600/oz psychological level at the beginning of this week on the reports of new deaths from the virus in China and other Asian countries.

Fig.1 Gold, Daily chart

Meanwhile, Silver also hit monthly highs of $18.60/oz, adding $2 or 12% since it bottomed at $16.50/oz in December 06.

Fig.2 Silver, Daily chart

According to the latest report by the China’s Health Commission, the death toll rose to 2.236 (118 new deaths) and the confirmed cases climbed near 75.500 as of February 20th. Furthermore, South Korea confirmed its first death from the virus yesterday while the total confirmed cases rose to 156. Japan’s health ministry confirmed the deaths of two elderly passengers, both in their 80s, who were on board the Diamond Princess cruise ship, the biggest cluster of infection outside China.

 

Lower interest rates support the non-yielding precious metals:

The non-yielding precious metals are becoming more attractive for risk-free investors if the interest rates remain at the current lower levels. The Central Banks of the developed countries have cut their interest rates while the local governments have applied more fiscal stimulus plans to support their economies from the virus disruption effects.

People’s Bank of China lowered its benchmark one-year loan rates from 4.15% to 4.05%, and the five-year rate from 4.80% to 4.75% two days ago. The cuts followed the central bank’s move on Monday to lower the interest rate on its one-year medium-term lending facility — funds that PBOC lends to financial institutions — from 3.25% to 3.15%.

 

US dollar- Commodities: Inverse relationship?

The rally of dollar-denominated precious metals has happened despite the strong appreciation of the US dollar index-DXY, nearing 3-year highs of 99.90.  The leading currency of the world has surged by almost 2% across the board this week and especially against the other significant currencies of Euro and Japanese Yen.

Fig.3 US Dollar index (DXY), Daily chart

 

The greenback has received strong safe haven flows due to the recent geopolitical risks in the Middle East, the coronavirus outbreak, the resilient US economy on global risks and the potential for recessions in Eurozone, China and Japan.

The stronger US dollar is usually associated with weaker commodity prices which are priced in the US dollar and the opposite. Therefore, any upside of the greenback makes the dollar-denominated commodities more expensive for investors holding foreign currencies.

 

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Vrasidas Neofytou

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