Coronavirus fears: Is it a good time to buy gold?

Gold, which was hovering around $1,321 an ounce in January 2019, has already breached $1,600 per ounce in the past few sessions to a seven-year high.

For an asset class that has already seen an appreciation of around 25 per cent in a year, analysts expect the onset of coronavirus (Covid-19) to fuel a further upside in gold prices over the long-term should the panic spread.

In the short-term (six months), however, they expect the upside to be limited given the rally since the past year.

Gold, which was hovering around $1,321 an ounce in January 2019, has already breached $1,600 per ounce in the past few sessions to a seven-year high.

“The effects of coronavirus is adding to global woes.

"At a time when we were beginning to think that there could be some resolution to the trade wars, the onset of coronavirus has dealt a double blow to an already slowing world economy,” says Kishore Narne, associate director for commodity research at Motilal Oswal Financial Services.

Meanwhile, the total number of coronavirus-related deaths in mainland China have crossed 2,700, while the number of confirmed cases in mainland China are above 78,400.

Moody's Analytics has forecast a global recession if this health scare becomes a pandemic, and the odds of that are uncomfortably high and rising with infections surging in Italy and Korea.

“Gold prices are likely to remain range-bound in the next six months given the rally seen over the last one year.

"However, one needs to monitor coronavirus-related developments and how global economy plays out.

"A rise in cases / fatalities could push investors to safe-haven assets like gold and silver, which in turn will see their prices move up,” says G Chokkalingam, founder and managing director at Equinomics Research.

Policy-wise, global central banks are likely to resort to more stimulus measures in the form of rate cuts and/or pumping in more money to revive growth.

All this can trigger a liquidity-driven rally in most asset classes, including gold.

How equities will react to this move will also depend on how corporate earnings play out, analysts say.

UBS expects global to take a serious hit and slip to 0.7 per cent in the January 2020 quarter (Q1-2020) from 3.2 per cent in the December 2019 quarter (Q4-2019).

Though the brokerage expects growth to rebound in the April -June 2020 period, the impact could slow the overall 2020 GDP growth by 20 basis points (bps) to 2.9 per cent.

“US-China trade tension had earlier led Asia ex-Japan (AxJ) monetary policy rate to a post-global financial crisis (GFC) low.

"The AxJ fiscal deficit is now being pushed to its widest post GFC amid the coronavirus outbreak.

"Both fiscal and monetary easing are underway, with the 2020 AxJ fiscal deficit expected to widen to 8.4 per cent of GDP versus 7.8 per cent in 2019.

"We expect AxJ central banks to ease cumulatively by between 0-50 basis points this year,” wrote Deyi Tan, an economist at Morgan Stanley in a recent report.

According to reports, China, Hong Kong, Korea, Singapore, Taiwan, Malaysia and Thailand have already put in place measures focused on providing financial support and debt relief in the form of interest subsidies / fee waivers, lending facilities, restructuring of repayment schedules, and relaxing ceilings for personal loan lines, particularly for affected sectors and emergency debtors post the coronavirus outbreak.

“Whenever central banks dump liquidity into the system, gold is an asset that normally grabs this.

"If one is looking to invest in gold from a six – 12 months, use every decline to accumulate.

"Expect prices to rise another 13 – 15 per cent from here on,” Narne says.

Photograph: Reuters