Safe-haven demand to wane as coronavirus fears subside

The spike in gold yesterday above $1600 is likely to be short-lived. The reason for the spike was concern that Apple’s missed revenue warning for Q1 was going to be symptomatic of a wider supply chain issue in China due to the coronavirus outbreak. However, the medium-term outlook for gold is to the downside.

The gold/copper ratio has surged to very high levels that cannot usually be sustained. It looks like creating triple top signaling that risk aversion has now become too extreme. Look at the chart below from the Bloomberg Market’s Live Blog which showing the three times the gold/copper ratio has hit similar levels (they are circled):

Furthermore, if you look at the overlay of the OECD leading indicator we see another hint that gold prices may be heading lower. Firstly, what is the OECD leading indicator? Well, here is the definition from the OECD website.

OECD is a composite leading indicator (CLI) designed to provide early signals of turning points in business cycles showing the fluctuation of the economic activity around its long term potential level. CLIs show short-term economic movements in qualitative rather than quantitative terms.

If you look below, you can see that as the OECD turns up, gold turns down. The OECD is the blue line on the chart below, the white line is gold spot prices:

In the big picture, the global economy shows signs of turning around. US and China have agreed on a phase 1 deal and we expect some goodwill towards China after a rough run over the coronavirus outbreak. However, the projections seem to point to the coronavirus being a Q1 blip. With China stepping in to prop up the economy and other central banks around the world willing to do the same then we can only see more downside for gold to come in the medium term.

Technically there is an R1 Pivot Point just above current prices and that may well be the turning point for gold. We are certainly looking out for it as the market focuses back on recovery.