Gold sidelined in Asia as deflation risks mount with oil price slide

Gold is trading largely unchanged on the day near $1,685 at press time, having faced rejection at the descending 5-day average at $1,693 early Wednesday. 

Deflation risks rise

The US oil prices, which began the year near $61, fell into the negative earlier this week on oversupply concerns. The coronavirus pandemic has caused massive demand destruction, leading to filling up of storage tanks in the US. 

At press time, the West Texas Intermediate is reporting an 80% year-to-date decline and Brent is down more than 70%. The massive crash in oil prices will likely compensate for inflationary policies adopted by the US Federal Reserve and other major central banks and cause deflation or reduction in the general price level in the global economy. 

Gold is widely considered as a hedge against inflation or the decline in the purchasing power of the fiat currency. In deflation, however, the purchasing power of the US dollar goes up. Hence, some observers consider deflation as a bearish development for gold. 

However, the downside could be limited, as gold is also a hedge against the economic crisis. Both central banks and governments have already launched massive monetary and fiscal lifelines, respectively, and have little room left to do more. So, if the coronavirus pandemic shows no signs of slowing down, haven demand for gold will likely strengthen. 

As for Tuesday, the focus remains on the dollar index, which is flatlined near 100.25 at press time. The greenback gained ground on Tuesday as oil price crash triggered a dash for cash. If that trend continues on Tuesday, the yellow metal will likely come under pressure 

Technical levels