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Chart of the day: Can Fed rate cuts support gold as investors liquidate for cash?

Investors are liquidating gold in a flight to cash as crisis mode sets in. Trading on the 1500 level, how soon will gold find support in the near zero Fed funds rate?

XAUUSD chart

Gold (XAUUSD) has sold off more than 10% since 9 March, when it closed above 1700 USD. At close yesterday, the precious metal was holding above the 200 MA and the uptrend since July 2019.

The safe haven is working

Investors move to safe havens as a hedge against risk in uncertain times, which is what saw gold rally towards 1700 USD. But as the crisis has ramped up, investors have been liquidating gold in a scramble for cash, notably US dollars, to cushion the blow of the fallout.

Selling gold is a quick cash grab, and forced liquidation in a time of crisis shows gold doing its job as a safe haven.

Gold isn’t the only precious metal that’s sold off, so has silver (XAGUSD), platinum (XPTUSD), and palladium (XPDUSD). The multi-asset sell-off shows panic, which will likely continue until volatility calms.

Fed funds rate back at zero

Federal funds rates at 0% tend to support markets, and the policy response has been quick during this fallout.

XAU chart
"Source: Bloomberg"

Gold suffered during the GFC but went on to rally to all-time highs, helped by low rates that offered little yield on USD cash holdings.

A daily close below the uptrend since July 2019 could be confirmation that the 1500 level won’t hold in the short-term. In this case, we’d be looking at the long term for gold to find benefits in the near zero Fed funds rate: once the virus is contained and economies begin to recover, low rates might just push gold higher.

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