Gold Runs Out of Steam as Expectations for Recovery Improve

Ibeth Rivero

The Fed statement didn't signal confidence regarding the effectiveness of leaving the interest rates on a range that is close to zero. They just stated that they will continue monitoring the situation and that will use its available tools to support the economy when it is needed.

GoldGold futures declined for a fourth straight session on Wednesday, falling 1.28 percent so far this week, and 1.84 percent since the end of Friday's session.

According to the Commerce Department’s Bureau of Economic Analysis, the US economy contracted by 4.8 percent (year-to-year) in the first quarter. This was the sharpest contraction of the Gross Domestic Product since the fourth quarter of 2008 and was caused by the spread of the coronavirus on the United States, as it obligated the government to order closing non-essential businesses (most of them in the services sector) like restaurants, and pushed down domestic consumption, one of the main economic forces in the US.  Other economies are also facing the same troubles, for example, the eurozone's economy is expected to contract by 3.5 percent in the first quarter, and the International Monetary Fund expects it to contract by 7.5 percent this year.

The coronavirus epidemic also keeps advancing around the world. At the moment there are about 3,220,847 confirmed infections and a death toll of 228,239. In the United States alone there are 1,064,572 confirmed infected individuals and a death toll of 61,669.

Gold tends to perform well when there are signs of unease in the markets. However, given that several governments, among them the United States, are already announcing that they're considering lifting up the restrictions associated with the attempt to stop the advance of the Covid-19 epidemic, it makes sense that many traders stopped panic-buying precious metals and safe-haven assets.

In other words, the perspectives for economic recovery increased optimism regarding the future performance of riskier assets, like stocks, which decreases the necessity of protecting portfolios by acquiring safe-haven assets. Hence the fall in gold demand, which is widely used as a hedge against risk, and the rush towards riskier assets.

It is also remarkable that this happened despite the recent weakness of the US dollar, which has fallen 0.79 percent against a bundle of its main competitors so far this week. As many already know, the depreciation of the dollar tends to favor the gold performance, as it usually drives up the foreign demand of this metal.

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The Federal Reserve's announcement of Wednesday afternoon made the metal bump higher for a moment, just to fall again and close on the negative territory. The central bank highlighted the medium-term risks to the economic outlook and kept the interest rates on hold, signaling that the situation could continue that way until the US returns to its path towards full employment and price stability.

“We’re going to not be in any hurry to withdraw these measures or to lift off. We’re going to wait until we’re quite confident that the economy is well on the road to recovery,” the central bank said.

The Fed statement didn't signal confidence regarding the effectiveness of leaving the interest rates on a range that is close to zero. They just stated that they will continue monitoring the situation and that will use its available tools to support the economy when it is needed.

The Fed didn't say anything significant about the future of the bank's asset purchasing program besides its continuation as long as it is needed. US fiscal policymakers also decided not to provide details about any of the programs that the bank has implemented during the current crisis.

Now the markets are facing mixed signals. On one hand, the fact that there could be a significative advance towards a Covid-19 treatment and positive economic recovery expectations will feed the risk appetite and continue favoring riskier assets. On the other hand, markets are getting data about the effects of the lockdown on the economy, which are not going to be very encouraging.

This makes the outlook for gold quite confusing, though many are already betting for increasing money supply and fiscal stimulus, which tends to favor this market in the long run.

About the Author
Ibeth Rivero

Ibeth contributes daily market commentary in both English and Spanish (both of which she speaks fluently) and she also manages the DailyForex mobile app to ensure that traders around the world are getting important market updates in real time.

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