Update: The Bank of England has reduced interest rates further to 0.1%, in a second emergency cut prompted by Covid-19.
This means that interest rates are at their lowest levels in history as the coronavirus moves UK economic policy into uncharted territory. Markets have reacted well to the latest decision so far, with the pound up 2.8% against the euro and 1.3% against the dollar. The FTSE 100 is also 1.3% or 65 points higher on the day at the time of writing.
This is a desperate measure for a desperate situation, with Britain now a whisker away from negative interest rates, as both the government and central banks are quickly acknowledging that the economy faces a sharp downturn. The question now is whether the Bank’s assumption that the hit will be temporary is correct. It could be: infrastructure of global supply and global demand could bounce back quickly once the outbreak passes.
Attention will now shift to the US. If it becomes the new epicentre of the virus then we can expect further falls in financial markets, but if the outbreak can be contained and monetary measures take effect there will be scope for stabilisation. Market volatility will continue for now until the picture becomes clearer and gold is expected to be part of that. There is a general consensus that once markets stabilise, gold could begin a significant ascent higher in value.
March 10th: At an emergency meeting on the 10th March, the Bank of England joined its US counterpart in cutting interest rates in an effort to bolster the economy amid the coronavirus outbreak.
The move came as official figures showed that GDP growth flatlined in January before the virus hit Europe, adding to fears that the economy is in a weak position heading into what could be the worst phase of the outbreak.
In his final week as the governor of the BoE, Mark Carney announced a wide array of measures designed to correspond with the chancellor’s Rishi Sunak’s budget, which was also unveiled today. In it, Sunak pledged approximately £30 billion to soften the impact of Covid-19, announcing measures to safeguard the NHS, help businesses and increase the availability of sick pay and benefits.
As the Federal Reserve and Bank of England both announced cuts to interest rates, the European Central Bank is widely expected to do the same tomorrow in an eagerly awaited meeting. But what does that mean for the markets, and gold in particular?
Volatility: the only certainty
The market response is still on-going, but so far the knee-jerk reaction in financial markets has been very mixed. In the US, President Trump signalled he would consider additional ways to stimulate the economy after the Fed did their part – including a payroll tax cut – but so far the White House has yet to announce any specific measures. The S&P 500 fell more than 2% in early trading on Wednesday, after tumbling nearly 8% on Monday, and rising 5% on Tuesday as investors wait for Trump to act.
In the UK, the pound rose against the dollar as chancellor Sunak delivered his budget, but the rise was largely to its previous levels, up 0.25%. UK government bonds actually fell, which is not the response you would usually expect after a relatively large fiscal expansion; bond yields fall as prices rise when investors buy more debt.
Meanwhile oil prices fell by more than 20% in one day over the weekend, the largest one-day decline since 1991, as Saudi Arabia announced in a surprise decision to slash prices. At one point on Sunday evening, crude oil futures were down approximately 40%. Hopes of a recovery in oil prices in the short-term have been pinned on the coronavirus being contained faster than expected.
What’s happening to gold prices now?
A health catastrophe on this scale is unprecedented in a global economy, and at present it’s unclear when it might start to subside. The emergency measures explained above could be a sign of things to come; and historically these have proven positive for the price of gold.
Gold has reached seven-year highs over Coronavirus concerns and may drive prices above its all-time peak of $1,900/oz, which was set in 2011. Since then the precious metal has receded slightly, with many experts saying this is due to traders being forced to cash in their positions to cover losses in stocks and elsewhere.
In pounds, the gold price hit a new record above £1,300 late last month, and it is at around £1,280 today. However this is more likely due to sterling weakness and it’s still some way off its peak in US dollars, which its typically priced in. Since moving briefly above $1,700, it’s settled around $1,650/oz.
In conclusion, if we see a rebound in stocks we may see gold head back towards the $1,700 area while the long-term environment for the precious metal remains bullish. If we continue to see rate cuts, additional expansionary plans and cuts to global growth forecasts, gold will continue to rise – especially as the coronavirus continues to spread.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.