Despite the significant risk-off sentiment, gold prices are looking to the week with a loss, currently down nearly 4% from last Friday; however, Steven Dunn, head of ETFs at Aberdeen Standard Investments, said that the metal is still doing what it is supposed to.
The comments come as gold prices give up most of their gains from earlier in the week. April gold futures last traded at $1,587.50 an ounce.
Despite the selling pressure, Dunn said the precious metal is still acting as an insurance hedge as U.S. equity markets see their worst weekly selloff since the 2008 financial crisis. By comparison, the Dow Jones Industrial Average is down roughly 14% on the week, dropping more than 4,000 points.
"You have to remember that gold doesn't wear a cape," Dunn said in a telephone interview with Kitco News. "It's not going to be immune to selling pressure, especially if there is a liquidity squeeze in the marketplace."
Dunn said that from conversations he's had with market participants, gold is getting hit on two fronts. First, the sharp selloff in equity market has created some margin calls and investors are selling liquid, profitable trades like gold to meet their funding requirements. The second factor is a strong U.S. dollar as investors shift into cash to wait out the latest financial maelstrom.
Although gold is suffering, Dunn said that investors should continue to look to gold as an essential insurance policy as the full economic impact of the spreading coronavirus is still unknown.
"With everything that we are seeing in the news about the virus, I think that there are going to be more challenging days ahead," he said. "I wouldn't want to push gold aside at this moment."
Dunn said that the question investors are currently asking is: how are governments and central banks going to respond to weak global growth as a result of the virus. The Federal Reserve has been reluctant to signal another rate cut, but markets see a 50% chance further easing next month. Markets see the possibility of interest rates falling to zero by the end of the year.
Coupled with looser monetary policy, Dunn said that he sees more fiscal stimulus from governments around the world.
"Low interest rates and growing deficits are going to be good for gold," he said. "I do think a response to this virus is going to require intervention by government and central banks," he said.
Even as gold prices struggle to hold on to $1,600 an ounce, Dunn said that he is holding steady with his forecast for prices to push to $1,700 an ounce in 2020.