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Can gold surge to US$2000 on coronavirus scare?

It’s ugly out there. The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is an ocean of red ink this morning as our market tumbles along with global share markets.

The spread of the coronavirus is to blame and economists fear that a pandemic will put the brakes on the already modest economic growth forecasts for 2020.

This is the type of climate where gold shines and some experts believe the precious metal could race up to US$2,000 an ounce, according to CNN.

Fear is gold’s best friend

This is because fear is forcing investors to look for safe harbours and that explains why ASX gold miners are a rare bright spot on the ASX today.

The Newcrest Mining Limited (ASX: NCM) share price gained 1.9% to $32.58, while the Northern Star Resources Ltd (ASX: NST) share price and Evolution Mining Ltd (ASX: EVN) share price jumped 2.4% each to $12.91 and $3.86, respectively, in early trade.

The gold price outperforms whenever investors are nervous although the commodity performed remarkably well over the past year as ebullient investors pushed global share indices to record highs.

Multiple stars aligning

The price of the yellow metal is up by around 20% over the past year and this is because of falling interest rates.

Yields on a range of assets have been falling steadily as central banks (including ours) cut rates to not much above zero in order to stimulate growth.

Low yields increase the appeal of gold as it lowers the opportunity cost for holding the asset. The stimulus efforts of central banks also undermine confidence in fiat currencies and that provides an additional uplift for gold.

Gold’s second attempt to reach US$2,000?

The low rate environment is here to stay, but now gold may have an extra tailwind from the emerging SARS-like pandemic.

This is why some are starting to speculate about how high the gold price can get. After all, gold nearly topped US$2,000 an ounce during the European debt crisis in 2011.

CNN’s Business Fear & Greed Index, which uses seven measures to determine market sentiment, fell to just above the “fear” level. It was pointing to “extreme greed” just a week ago!

ASX gold miners in pole position

ASX gold miners are likely to get an extra boost too. If fear continues to rise, the Australian dollar will come under further pressure. It already dropped below US68 cents on the coronavirus scare.

Gold miners with local operations will see their margins expand as their expenses are priced in Australian dollars while they sell their commodity in US dollars.

The rest of our market may not be so lucky. What’s also adding to the uncertainty here in Australia is the profit reporting season that officially kicks off next week.

Some analysts believe it will tough season to get through for our market. While profits won’t fall off a cliff, the overstretched valuation from the share market rally leaves stocks vulnerable to disappointing news.

It looks like gold could be set for another good year.

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Motley Fool contributor Brendon Lau owns shares of Evolution Mining Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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