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Wednesday, January 29, 2020

Gold Nudges Higher on China Risks as Fed Stays

© Reuters. © Reuters.

By Barani Krishnan

Investing.com – Gold prices nudged higher on Wednesday as the Federal Reserve kept U.S. interest rates unchanged and broad risks to China’s economy from the coronavirus outbreak provided underlying support for safe havens.

Spot gold, which tracks live trades in bullion, was up $1.35, or 0.1%, at $1,571.15 per ounce by 2:17 PM ET (19:17 GMT), as the Fed kept the benchmark federal funds rate unchanged at a range of between 1.5% and 1.75% after three previous cuts in 2019.

Benchmark gold futures for February delivery on New York’s COMEX closed the session marginally higher before the Fed decision at 2:00 PM ET. February gold settled up 60 cents, or 0.04%, at $1,570.40.

Both bullion and gold futures had retreated on Tuesday from peaks reached earlier in the week amid the global health scare triggered by China’s coronavirus crisis. On Monday, spot gold scaled $1,588.62, while COMEX’s front-month gold contract reached $1,588.10 — a three-week high for both.

With a day to go before the end of January, bullion was up almost 4% for the month while the futures market showed a gain of just over 3%, keeping with similar gains from December.

“The asymmetry in the Fed's reaction function will continue to be the main underlying driver supporting precious metals markets through 2020,” TD Securities said in a note.

The Fed said that in light of global economic and financial developments and muted inflation pressures it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support”.

But more than the Fed’s narrative, gold was finding strong underlying support from central banks and also safe-haven demand related to China’s coronavirus crisis, some analysts said.

China’s economic growth may drop to 5% or even lower due to the viral outbreak, possibly pushing policymakers to introduce more stimulus measures, Zhang Ming, an economist at the Chinese Academy of Social Sciences, a top government think tank, said.

As the world’s No. 2 economy and the biggest buyer of virtually every natural resource, any slide in Chinese growth will have major global market disruptions, leading to more risk flights and demand for protective assets like gold, U.S. Treasuries, the Japanese yen and Swiss franc.

Adding to the weaker outlook for the Chinese economy, British Airway and Lufthansa announced on Wednesday they had canceled all flights to China, while Toyota said it would suspend vehicle production in the country.

The World Health Organization is, meanwhile, considering again whether to designate the coronavirus outbreak a matter of global concern. So far, the death toll in China has breached 130 and the number of reported cases is growing by around 50% a day.

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