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Rate Cut Makes Gold Even More Attractive

Mar. 05, 2020 12:38 PM ETIAU
Clif Droke profile picture
Clif Droke


  • Latest Fed interest rate cut is music to the ears of gold investors.
  • Gold's competitive advantage with sovereign bonds has improved.
  • Global recession fears will keep gold price buoyant in the coming months.

The emergency cut of the Federal Reserve's benchmark rate has given gold yet another new lease on life. After last week's price plunge, the yellow metal came roaring back to life this week as economic uncertainties relating to the COVID-19 virus returned to Wall Street. In this report, I'll make the case that gold's "fear factor" can maintain the metal's rising trend even after the coronavirus threat ends.

If there was ever any doubt that gold's primary function is as a safety hedge against geopolitical and economic uncertainty, the events of the last two weeks should satisfy even the most stubborn skeptic. The recent 5% pullback in the gold price was likely a result of a technically overheated market condition, coupled with heavy profit-taking after the precious metal hit a multi-year high.

But now that market participants have had a chance to weigh the latest developments pertaining to the coronavirus - as well as the all-important interest rate outlook - it's clear that the bulls still have control over gold's intermediate-term (3-6 month) trend. The fact that the gold price stopped short of violating the widely watched (and psychologically significant) 50-day moving average is also another piece of supporting evidence suggesting the bulls won't surrender their control of gold's intermediate trend anytime soon.

Gold Continuous ContractSource: BigCharts

While the dust still hasn't settled from Wall Street's coronavirus panic, now would be a good time to assess the widespread damage and the most likely outcome for gold as it pertains to this panic. Let's start with a market overview which underscores gold's relative strength versus its leading competitors. It should be noted that gold is the best-performing asset of 2020 to date and the only one with a net gain. The extent to which gold is outperforming other major asset categories is shown in the following chart.

This article was written by

Clif Droke profile picture
Clif Droke is an equity research analyst and writer for Cabot Wealth Network. He has covered equities and commodities, specializing in gold, since 1997 and is the editor of the Cabot SX Gold & Metals Advisor.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IAU over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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