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Fears about the spread of coronavirus around the world and its transmission from person to person in the United States led to a large-scale correction of US stock indices, a fall in the yield of 10-year treasury bonds to record lows and cut the dollar's wings. As a result, gold soared to its highest level since 2013, but the bulls failed to continue the rally. Precious metal lost about $50 per ounce over a short period of time amid profit taking by speculators on long positions.
TD Securities draws attention to the fact that hedge funds increased their net longs for gold by 22% by the end of the week by February 18, and currently they are located in a territory that the market has never seen. As a result, the risks of sudden XAU/USD pullbacks are greater than ever. If the bulls are seriously scared, the precious metal may collapse below $1,600 an ounce. In contrast, Goldman Sachs believes that if coronavirus in fact proves to be a longer-lasting factor and continues to scare investors in the second quarter, gold will rise to $1,850.
So far, we can only say that a favorable background has allowed buyers of ETF products to increase inventories to a record high of 2624.7 tons. Capital inflows to specialized exchange funds have been going on for 25 days in a row. It could have been otherwise if the S&P 500 loses more than 3% of its value for two consecutive days, which has not happened to it since the massive devaluation of the Chinese renminbi in August 2018. The yield on 10-year US Treasury bonds has completely renewed record lows. As a rule, falling rates in the US debt market is good news for non-interest bearing gold.
Dynamics of gold and US bond yields
The last time the yield on 10-year Treasuries was at 1.4% was back in 2012 and 2016, when the federal funds rate did not exceed 0.5%. It currently stands at 1.75% and seems to be too high for the debt market. As well as the derivatives market. CME derivatives are almost 80% likely to expect the Fed to weaken its monetary policy in June. Monetary expansion is a bullish factor for XAU/USD. Gold competes not only with bonds, but also with currencies. The fact that it is growing against the dollar and against the euro, and even reached a record high of more than €1,500 per ounce, indicates that investors prefer precious metals.
Indeed, if, as a defense against coronavirus, the leading central banks of the world begin to actively mitigate monetary policy, gold will be able to repeat its successes in 2019, when it grew by 18% due to the active reduction in rates around the world as a protection against the adverse effects of trade wars on global GDP.
Technically, the precious metal reached the target by 200% according to the AB = CD pattern, after which, as a rule, the risks of rollback increase. The chances of correction will become even higher if the bears manage to storm the support at $1628 and $1614 per ounce. However, one can not even dream of a reversal of the upward trend without the implementation of the "Surge and Reversal with Acceleration" pattern. Purchases at lower prices are still relevant.
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