Gold ended Thursday's session virtually unchanged after trading within the 1568.60/1546.31 range established on Tuesday. The yellow metal continues to be both pushed and pulled by concerns about the Wuhan coronavirus.
The city of Wuhan – the epicenter of the outbreak - with a population around 11-million has essentially been blockaded with no public transportation in or out. This is occurring even as the massive Lunar New Year migration in China is fully underway. Beijing has canceled major public New Year's festivities in an effort to control the spread of the disease.
Wuhan is one of the four busiest rail hubs in China and reportedly handles more passenger volume than Beijing and Guangzhou. Not only are the people of Wuhan trapped in Wuhan, but people from the eastern cities trying to get to their family homes in the west for the New Year are likely experiencing considerable difficulties.
Freight traffic typically slows during Lunar New Year in order to accommodate the need for more passenger trains, but the broader impact on freight traffic resulting from efforts to curtail the spread of the virus is not clear at this point. Wuhan is a port along the New Silk Road, with many trains departing to Europe every week, according to RailFreight.com.
The coronavirus will almost assuredly have a significant and direct impact on the Chinese economy, but the negative influence could be further reaching. Those risks amplify the longer the crisis persists.
Commodity prices are suffering as a result. Copper, for example, was down more than 2% at one point intraday. The red metal is off more than 5% from last week's high at 2.8840 and more than 38.2% of the Phase One trade deal inspired rally has already been retraced.
Gold is being weighed by those broader deflationary concerns. While gold is a hedge against deflation, the initial reaction to such risks is bearish. The yellow metal is a component in just about every commodity index and fund. As investors dump those securities to pare commodity exposure, they are selling gold.
On the other hand, that reaction has been tempered somewhat by safe-haven demand associated with diminished risk appetite. I suspect the influence of these two competing scenarios will ebb and flow in the days ahead based on the news out of China.
Ultimately, the underlying trend in gold remains bullish. The 20-day SMA is offering support at 1551.15. If this level gives way, the low from last week at 1535.94 would be vulnerable to a retest.
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