Gold holds above $1,600/oz after Fed rate cut, virus uncertainty looms

New York — Gold held firm above $1,600/oz at the start of the London trading day on Wednesday, as uncertainty surrounding the coronavirus impact loomed, while an emergency interest rate cut by the United States Federal Reserve failed to bolster US equities.

Considered to be a traditional flight to safety investment, gold has been on a tear since the COVID-19 outbreak, although last week it took a breather with long positions sold to possibly cover margin calls elsewhere.

However, the metal got a boost during intraday trade on Tuesday after the US Fed cut the base rate by 50 basis points in a bid to shore up the world's largest economy, in the face of the virus and its ramifications.

Gold was spot bid as of 0745 GMT around $1,635/oz, from around $1,593/oz at the start of trading on Tuesday.

The bullion had been moving fairly sideways throughout the session, then popped higher in the afternoon after the Fed announcement, hitting a high of around $1,645/oz on the news.

"The only thing that's certain, is uncertainty," said one trader, "and that can only be good for gold."

Dutch bank ING was also bullish on the outlook for gold.

"Given the current environment and the expectation that there is more easing to come from central banks around the globe, we continue to hold a constructive outlook for gold," the bank said in its daily research.

There was a frantic swing in sentiment on the Fed news, with the Dow Jones Industrial Average Index initially jumping over 300 points, only to be sold down as the information was digested.

"Initially markets responded strongly to the Fed's emergency cut, but they have since settled down, with traders interpreting it as a sign that the economic implications of the epidemic are turning out to be greater than anticipated," ANZ told clients.

There is skepticism around what an interest rate cut can do to actually counter the threat of COVID-19.

"Whilst many have made the point that lower rates won't fix the problem of the outbreak, it does, all else being equal, help to deliver some support to markets by providing clarity and a sense the Fed is not going to ignore risks and is prepared to avoid any tightening in financial conditions," Markets.com analyst Neil Wilson told clients.

Gold started 2020 around $1,515/oz, and has been in focus since the coronavirus started to spread from its country of origin, China, to other parts of the world.

As the virus continues to spread globally, so does confusion and volatility with global equities taking a beating last week, on the basis of a coronavirus-led sell-off, erasing about $6 trillion of market value, according to S&P Dow Jones Indices.

"The Fed's surprise 50bps rate cut resulted in gold rallying over 2% in the immediate aftermath," Standard Chartered analyst Suki Cooper said. "Gold's focus is likely to remain on global monetary policy reaction in coming sessions, and positioning is likely to be nimbler given the recent profit-taking."