Gold soars to seven-year high as coronavirus panic hits risk appetite
Bullion is set for its biggest one-day gain since late 2018
Gold has hit its highest level in seven years and is on course for its largest one-day gain in nearly 18 months. This was buoyed by investor concern over the rapid spread of the coronavirus outside of China.
Gold has rallied by nearly 12 per cent since the start of the year, compared with a 15 per cent drop in the oil price and a 3 per cent rise in the S&P 500.
As the number of cases of Covid-19 outside of China have increased, particularly in the past couple of weeks, investor risk appetite has receded. This has pushed gold up by nearly 7 per cent and the S&P down by nearly 1.5 per cent in the past five trading days alone.
“It can be tempting to call a market overbought and call for a correction just because it has gone up a lot," said LCG head of research Jasper Lawler. “Fortunately we resisted this time, saying on Thursday: 'Our best assumption is that the breakout holds and that prices move in the direction of $1,650 per ounce in fairly short order'.”
The virus, which broke out in the city of Wuhan in Hubei province in central China late last year, has killed more than 1,000 and infected almost 80,000. While most cases have been in China, the disease has spread to at least 29 other countries. On Monday, Iran reported 50 had died from the illness, while in Italy a fourth person died.
Gold is often perceived to be a safe haven in times of extreme financial market, or geopolitical turmoil. It tends to move inversely to more risk-sensitive assets such as the stock market, copper, oil and even the dollar index.
The price was last up by about 2.5 per cent at $1,683 an ounce, making this its largest one-day gain in percentage terms since October 2018.
Also reflecting the heightened tension among investors was the jump in the VIX volatility index. The VIX, known as “the fear index” tracks the volatility of options on the S&P 500, has touched its highest since August.
“For experienced short-term traders, this jump in volatility must be great after what was a very quiet 2019,” wrote Fawad Razaqzada, a markets analyst for TradingCandles.com.
Investors are betting very heavily on a sustained rally in the gold price above $1,700 an ounce. Data from CME Group, which offers futures and options trading in gold and other commodities, shows open interest in gold call – or buy – options at $1,700 expiring in June has more than doubled in just one week.
Options give the holder the chance, but not the obligation, to buy or sell a particular asset at a predetermined price by a set date. A rise in open interest in gold calls at a higher price suggests investors believe a bigger rally may be imminent.
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