Gold Retreats Despite Surge in Risk Aversion

Ibeth Rivero

As it appears right now, there are many circumstances that favor gold in the long run, as gold is considered a safer alternative to fiat currencies.

GoldGold prices have been very volatile as of late, showing the effects of the contradictory expectations that have been driving the market sentiment.

Last Monday, gold futures fell by 1.25 percent due to the optimism that surged in the markets. That day, markets reacted positively to the publications of a trial by Moderna's for a COVID-19 vaccine. The expectations for the release of an effective vaccine against the coronavirus drove traders and investors towards riskier assets, which didn't favor the yellow metal, as it's considered a "safe-haven asset".

On Tuesday, traders learned that the data that Moderna provided regarding the COVID-19 is not enough to determine how impressive the vaccine may be. In other words, testing on only a handful of people is helpful, but the sample size is too small to conclusively determine that the vaccine is a success. Following this news, gold's value recovered and gained 0.65 percent, a trend that continued on Wednesday despite the surge of optimism in the markets due to the US's steps towards reopening the economy.

On Thursday, market sentiment was dominated by the trade tensions between the United States and China. The Chinese government announced its intention to impose law in Hong Kong that would criminalize political dissent as an attempt to curb the political protests in the island, a move that pushed US senators to introduce a bipartisan bill that would sanction the Chinese government and any other organization that would participate in implementing those measures.

The geopolitical situation regarding in the Middle East is also getting worse, as there is a chance for a confrontation between the United States and Iran since the former is not allowing Iranian freighters to approach Venezuela.

“China’s aggressive stance on Hong Kong security could exacerbate already tense relations (with the US) and a possible confrontation between US warships and Iranian freighters headed for Venezuela are key concerns heading into the long weekend, prompting investor buying,”  an analyst told CNBC.

The situation pushed down the commodity markets (which were experiencing a resurge), including gold's which fell 1.72 percent, as they are particularly vulnerable to demand shocks from the Chinese markets. China also declined to set an economic growth goal for this year, which suggests that damage that the Chinese economy has suffered a significant amount of damage because of the advance of the outbreak.

Nevertheless, the fears for a trade war ended up tipping gold prices higher during Friday's session, with gold advancing 0.79 percent as risk aversion dominated the market sentiment. This also favored other safe-haven assets, like the dollar, and oil prices and equities.

Some analysts are optimistic regarding the long-term performance of the Gold markets. The impact of the epidemic, which at the moment has infected 5,417,348 individuals around the world and has killed about 344,194, in the global economy increases the expectations for further monetary easing and fiscal spending, which doesn't favor the outlook for fiat currencies. The future regarding the economy, with the risk of facing a second wave of the outbreak in the fall also remains uncertain, a situation that tends to favor safe havens in the long run.

As it appears right now, there are many circumstances that favor gold in the long run, as gold is considered a safer alternative to fiat currencies. In a previous article we explained that some financial advisors recommend investors to strengthen their portfolios, given the status of this metal as a store of value and the high volatility in the markets, and it seems that many are taking this advice seriously.

In any case, this week's advances in the gold markets couldn't offset the retreats. Gold futures price ended up retreating last week by 1.18 percent after two consecutive weeks of gains.

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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