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Gold trapped in a paradox sideways
27.01.2020, 20:46

Gold trapped in a paradox sideways

Gold futures on Monday continue to rise amid coronavirus outbreak in Chinese city of Wuhan. The price went almost to $1586/toz testing last week's highs at $1588.1 recorded on Friday.

Gold traditionally acts as a safe haven for investors when risks are on throughout the market and one might consider that the rise should be steeper amid current uncertainties. Gold prices rose throughout 2019 - throughout the uncertainties with the US-China trade tensions - from $1300/toz at the beginning of the year to $1550 at the end of the year. Another high in gold price was reached on Jan. 8, 2020 when the military conflict between the US and Iran threatened to evolve into massive Middle East disaster.Risk on is seen over the last few days in the markets with VIX volatility index reflecting investors' fears jumping above 18 on Monday or 56% up from Jan. 21. Even though, gold prices rose less aggressively by just 1.6%.

The true story behind the gold price volatility is that the price itself is denominated in US dollars, which has been strengthening since the beginning of this year. Current risks are not fueled by trade tensions that hurt the greenback in 2019. The Fed Reserve is unlikely to ease its monetary policy further this year in regards to interest rates. So the bullion is getting mixed signals from rising risks and a strong dollar. Moreover, the US economy is benefiting from the fears. Investors seek safe haven in the US Treasuries. The US 10Y Treasuries' yields went down from 1.8% to 1.6% on Monday morning. The US dollar index (DXY) is up to 97.7, the highest level since Dec. 3, 2019.

Divers signsls reflect poor gold reaction to rising risk. Nevertheless, gold performs upward short-term trend that could mean risks are prevailing. Further risk associated with US-EU trade tensions or other geopolitical factors could provide further support for the bullion prices.

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