Standard Chartered: gold in tug-of-war now but seen averaging $1,725 in 2Q

Gold prices are caught in a tug-of-war between acting as a safe haven and meeting liquidity needs. Still, expectations for further loosening of global monetary policy are likely to underpin the metal in the longer term, said Standard Chartered Thursday.

The metal has been on a roller-coaster ride lately, rising to a seven-year high above $1,700 an ounce but now closer to $1,600, with Standard Chartered blaming the pullback on profit-taking that materialized due to margin calls as stocks plummeted amid worries about the economic impact of the coronavirus outbreak. As of 9:27 a.m. EDT, spot gold was down $25.40 for the day to $1,609.40 an ounce.

“We believe prices will likely continue to be caught in a tug-of-war between safe-haven flows and liquidity needs; but beyond the near term, an environment of record-low U.S. Treasury yields, expectations of further Fed rate cuts, weak equity markets, dovish central-bank action globally, and growing negative-yielding debt will likely continue to stoke demand for gold as a diversifier and a safe haven,” said the report from Standard Chartered, written by precious-metals analyst Suki Cooper.

“In a weak physical market, technical support is likely to materialize around $1,600/oz, but we believe risks continue to lie to the upside and expect prices to average $1,725/oz in Q2 2020.”

Cooper pointed out that gold prices tend to firm after emergency rate cuts. They gained almost 3% in the immediate wake of a Federal Reserve emergency cut on March 3, before heading lower again.

The analyst pointed out that “gold was not always called upon as a liquid asset,” particularly in the 1990s and early 2000s, when gold prices were weak. However, during the Great Financial Crisis that began in 2008 and again, more recently, gold prices have been much stronger, making the metal “ripe” for profit-taking to meet margin calls when other markets weaken.

“We see upside risk for gold, but near-term gains could be measured,” Standard Chartered said.

Meanwhile, Standard Chartered pointed out that inflows of gold into exchange-traded products are on pace for their strongest month since last summer, even though there was a small outflow on Wednesday. ETP holdings are up a “staggering” 97 metric tons so far in March, leaving them at a pace for potentially the strongest month since August when they exceeded 100 tons.

“Fresh inflows are broadly spread between Europe and North America, but North American holdings are still some 190 [tons] below their peak reached in 2012, suggesting scope for further inflows,” Standard Chartered said.