By Carsten Menke
Yesterday's surprising interest rate cut by the US Federal Reserve caused a risk-off reaction in financial markets, pushing gold and silver prices up by around 3 percent. While global growth risks have risen due to the spreading of the coronavirus, we believe this is priced into gold and silver to a large extent. That said, yesterday's interest rate cut could further fuel bullish sentiment in gold and silver markets, skewing short-term price risks to the upside.
Just when it seemed that the rally in gold and silver markets had run out of steam, the US Federal Reserve added fuel to the fire.
Yesterday’s surprising interest rate cut pushed prices up by around 3 percent, a little more for gold and a little less for silver. While the US dollar and US bond yields went down after the cut, which is supportive for gold and silver, their reaction seems very strong.
It was amplified by a broader risk-off move in financial markets as equities tumbled on the back of mounting global growth worries. The Federal Reserve thus achieved the opposite of its intention, which was to alleviate growth worries and assure financial markets.
While global growth risks have undoubtedly risen because of the worldwide spreading of the coronavirus, we remain of the opinion that this should be priced into gold and silver to a large extent already today.
Safe-haven demand has been strong, measured by inflows into physically backed gold products, but there are no signs of panic buying thus far. Following yesterday’s interest rate cut by the Federal Reserve, we see a rising risk that today’s already bullish sentiment in the gold futures market could become even more excessive, luring more trend followers and technical traders into the market and skewing short-term price risks to the upside.
The same applies for silver although it needs to be remembered that it does not possess the same safe-haven characteristics as gold due to its industrial applications. A global recession – which we do not expect at the moment – would thus be positive for gold but negative for silver.
* Carsten Menke, Head Next Generation Research, Julius Baer