Gold gains on its immunity to the coronavirus

The emergency rate cut from the U.S. Federal Reserve on Monday to 1.25% is, according to market expectations, likely to be followed by another 50 bp cut at the regular FOMC meeting on March 18. So far the low point stands at 0.35% which could be reached before the November U.S. elections.

The elevated speculative position held by funds has raised some concerns about a sharp correction should volatility spike again like it did last week. When volatility spikes funds targeting a certain level of volatility in their portfolio are forced to reduce exposure across the board. This development hit gold last week when the Cboe VIX jumped to 40% (currently 37%).

Spiking volatility aside some concerns has also been raised about the sustainability of a near record long. It reached 285,000 lots in the week to February 25, before the mentioned VIX spike undoubtedly took some length out of the market. However, looking at the length relatively to the size of the cake, i.e. the open interest, we find the position not yet elevated compared with levels reached during the past 12 years.

Spot gold is currently heading for the highest daily close in seven years above $1660/oz. With another 50bp rate cut already priced in the prospect for additional gains depend on continued safe-haven demand. With this in mind the U.S. stock market performance hold the key to further gains.