Futures & Commodities

Gold on track for highest close in 7 years as investors hedge stock market highs and virus fears

Key Points
  • The precious metal was up a further 0.5% to trade at around $1,609.61 per troy ounce (/oz) during European morning trade on Wednesday, testing the levels last seen on January 8.
  • If the sport price settles above $1,604.1/oz it will be its highest settle since March 27, 2013, when gold settled at $1,606.2/oz.
  • James Gerrish, portfolio manager at Sydney-based Shaw and Partners, attributed the gold rally to strategic portfolio hedging rather than a direct response to the coronavirus outbreak.
  • In a note Wednesday, Citi upgraded its six-to-12 month price target for gold to $1,700/oz and upgraded its 2020 base case average gold price forecast from $1,575 to $1,640/oz.
An Argor-Heraeus SA branded two hundred and fifty gram gold bar, center, sits in this arranged photograph at Solar Capital Gold Zrt. in Budapest, Hungary.
Akos Stiller | Bloomberg | Getty Images

Having surpassed the key $1,600 mark, gold prices were flirting with a seven-year high on Wednesday, as investors continue to shore up their positions amid the coronavirus outbreak.

The precious metal was up a further 0.5% to trade at around $1,609.61 per troy ounce (/oz) during European morning trade on Wednesday, testing the levels last seen on January 8 after the U.S. killing of Iranian military commander Qasem Soleimani. If the sport price settles above $1,604.1/oz it will be its highest settle since March 27, 2013, when gold settled at $1,606.2/oz

Gold typically performs well during flights from risk assets, and has seen upside momentum as a result of global concern over the potential economic fallout from the new coronavirus, which has now infected more than 74,000 people in China, killing 2,004.

However, the recent surge continued on Wednesday despite positive momentum seen in global stock markets, with China returning to work following extended shutdowns and the rate of infections slowing on Tuesday.

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James Gerrish, portfolio manager at Sydney-based Shaw and Partners, attributed the gold rally to strategic portfolio hedging rather than a direct response to the virus.

"While interest rates are low, you need to own stocks so you need to go out there and invest your money, but you also need to have a hedge, an alternative if things don't go so well, and I think that is why gold is benefiting as a consequence of that," he told CNBC's "Capital Connection" Wednesday.

"It is probably not benefitting from actual Chinese demand at this point in time, so I think it is more about portfolio positioning."

Advancing to $1,700 this year

In a note Wednesday, Citi upgraded its six-to-12 month price target for gold to $1,700/oz and upgraded its 2020 base case average gold price forecast from $1,575 to $1,640/oz.

Citi commodity strategists also projected fresh nominal highs of $2,000/oz to be breached in the next 12 to 24 months.

"The set-up in gold options markets and call skew is reminiscent of 2010/2011, when gold last traded to $1,800-1,900/oz," the note said.

"Meanwhile, gold net long positioning — when normalized for the expanded asset base — is at only half the levels of the 2011 peak."

While acknowledging that a slowdown in physical demand in Asia, particularly jewelry sales, provides some downside risk, Citi analysts suggested that this would likely be offset by investor inflows and central bank gold buying.

Fragile equity bull market

Stocks in Europe and the U.S. continue to eke out fresh record highs, but Gerrish suggested that the composition of equity market gains could render them fragile.

"If you look at the composition of the U.S. market, the advances have been in these large caps, a very concentrated area of the market," he said, adding that the consistent marginal new highs are being driven by fewer stocks, with the breadth of the market decreasing.

Goldman Sachs highlighted this week that outside of the big five tech giants — Facebook, Amazon, Apple, Microsoft and Alphabet — earnings growth on the S&P 500 is flat.

"What we like to see in a healthy market is broad-based buying across the board. We are starting to see that thematic playing out in Australia as well, with a number of these select go-to stocks driving the market, whereas there is a lot of choppiness under the surface," Gerrish said, adding that U.S. equities in particular are likely to see a correction in the near future.