Gold reaches an all-time high amidst Geopolitical tensions and the Coronavirus continuing to fuel demand into safe-haven assets. The yellow metal's spot reached a high of $1944.52 during the Asia session, smashing the record print of $1923 by $21.
Geopolitical tensions and the Coronavirus are not the only factors driving the price higher for Gold. A weaker dollar, low-interest rates around the world, and massive quantitative easing and stimulus have increased the risk of stagflation. Sluggish growth and rising inflation fuels stagflation, in which bond yields returns are virtually non-existent. Gavin Wendt, a Senior resource analyst at Minelift Pty stated that “Strong gains are inevitable as we enter a period much like the post-GFC environment, where gold prices soared to record levels as a result of copious amounts of Fed money being pumped into the financial system.” This is further backed by both Bank of America and JP Morgan having a $3,000 price target for Gold.
With the Federal Reserve speaking at the end of this week, a dovish town from Chairman Jerome Powell may send the yellow metal upwards.
We can draw information from the Bitcoin in 2018, where the price almost touched $20,000 before experiencing a sharp reversal down to 3,000 by the end of the year. The difference between Bitcoin and Gold is that there has been a historical precedent for the metal performing as a safe haven in risk-off episodes. May it is for viable reasons or a self-fulfilling prophecy, the correlation has been stable over the past decades. With Bitcoin, it was a case of the “Greater Fool Theory” fueling the price upwards. The Greater Fool theory states that the price of a security is determined not by its intrinsic value (how much net cash flow it brings in), but the relative demand. In this case, demand for Bitcoin was up due to speculation in the cryptocurrency, pushing the prices higher. However, Gold's initial push upwards is on a valid basis, assuming that it holds its own as a haven asset. Therefore, if the macro environment continues to deteriorate, we will likely see Gold print new highs in the future.
Here is your week ahead
Wednesday, 29th July – AUD Consumer Price Index, Federal Reserve minutes and Interest Rates Decision
Thursday, 30th July – United States GDP Annualised
Friday, 31st July – China Non-Manufacturing PMI
Coronavirus cases: 16.2m
Coronavirus deaths: 648k
Gold finally pushes past $1,800 as retail investors plow $40 Billion into gold-backed funds.
As Coronavirus cases around this world approach 12 Million, Gold has seen a 19% rise year to date as investors continue to crave safe havens. HSBC's James Steel stated that prices" were already rallying well before the emergence of Covid-19", which has given Gold more momentum. Furthermore, the increase in Gold's investment has helped offset a collapse in Jewelry demand, with HSBC estimates being down 20% this year.
There have been other factors other than the Coronavirus increasing the demand for Gold. A low-interest-rate environment and quantitative easing tend to boost demand for metals as investors start looking for alternative safe investments that may provide capital gains.
James Steel predicts a push to $1,845 by the end of this year, before dropping to $1,705 the next year. However, some banks are more bullish on the bullion. They predict Gold prices to reach $2,000 in 2021, citing low-interest rates and devaluing the USD due to Quantitative Easing. "Gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower rates. "Alongside this, JPMorgan recommended investors to stick with Gold in the midterm, citing similar reasons.
It is interesting to note that clearly demand for Gold has been steady, pushing the price higher. However, at the same time, the demand for risk on the asset are still high, evident in the new records being set by the NASDAQ and many risks on stock such as Tesla and Amazon. It shows that this massive divide with investors is cautious of the recovery, and investors who think quantitative easing and fiscal stimulus will continue to prop up asset prices. If the economy continues to recovery, we are likely to see Gold move to the downside.
Will Gold breach $1,900? Anish has some brilliant analysis of the future price action of Gold and Silver. You can watch it here.
Commodity currencies are set to advance as manufacturing and oil usage rise across the world.
The Australian dollar and the Canadian dollar have been stuck within their respective consolidation zone, strengthening over the past couple of days. As the correlation between commodity currencies and commodity prices remain relatively strong, with the Bloomberg commodity index advancing 2.5% to 63.24, the highest since the start of April.
As China’s oil demand starts to reach pre-Coronavirus levels, manufacturers have started to purchase more iron and copper from Australia. However, tensions between the two countries have slowly risen, possibly dampening the likelihood of a breakout. In this case, China slapped an 80% tariff on Australian Barley exports, a $330 million industry. Many analysts speculate that these tariffs are in response to Australia’s strong push for an independent investigation into China's response regarding the Coronavirus. However, it is more likely due to the Australian government subsidizing exports barely, enabling exporters from Australia to sell them barely at lower than market prices – a process also known as “dumping.”
However, Adam Kibble, an investment specialist at Inisght, is bullish on the Australian dollar, seeing it rally to 70c against the greenback by year-end. Furthermore, he told Bloomberg that “Exiting the virus earlier [Australia], compared to Europe and the U.S., will be very positive for the Aussie.”
Moreover, with the Canadian dollar being sensitive to the change in oil prices, the price of the black gold has strengthened the loonie against the U.S. dollar. As a result, the boost cushions agriculture and commodity exporters into the U.S. Furthermore, other oil sensitive currencies such as the Norwegian Krone and Russian Ruble have strengthened over the past two days as demand for oil increases.
In spite of these currencies rising, today was generally a risk-off day after the risk-on rally yesterday. Here are the leading market moves:
As a senior analyst at Blackbull markets, Andre Almedia did some excellent technical analysis on the USD/CAD pair. You can watch it here.
Federal Reserve Chairman Powell reiterated that the US economy is good, but it faces some risks and has not revealed new information.
The market is also closely watching the progress of China-US trade negotiations.
The release of the FOMC minutes is failed to impress on the market.
The World Gold Council (WGC) said that global gold-backed exchange-traded products held more than the 2012 level and hit a record high in September report. ETF holdings increased by 75.2 tons in September, totalling 2,808 tons.
Powell said that the Fed would soon begin to expand its balance sheet again, which is partly a response to the turmoil in the loan market in September. In a speech in Denver, Powell delivered the method to expand its holder's securities and will be explained in the next few days.
In terms of broader monetary policy, Powell insisted on his latest view: the British disorderly Brexit. He said that the Fed is committed to supporting the economic recovery, but gradually data, there is no default rate cut process.
Although the Fed has already cut interest rates twice this year, the US president is still dissatisfied and continues to hit the Fed and Powell. Trump posted via twitter that the Fed has no clue, but the United States is still working well.
Also, the market is closely watching the progress of China-US trade negotiations. Liu He, China's top trade negotiator and vice-premier, travelled to Washington from October 10th to 11th to participate in the next round of trade negotiations. Good news and bad news may be mixed, but the overall will put the investor's sentiment in a negative tone. It helps the gold volatility, and the US dollar is defensive.
Technically, the gold price is committed to the 1500 barrier. Also, it will increase to 1520 before the 1535 resistance.