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Has Silver lost its Shine?

Silver has had a legendary run this year, is heavily correlated with Gold. However, that was only in regards to the movement.

Returns for Silver and Gold from the Start of the year - Start of September. Silver in Candlesticks, Gold in orange.
Returns for Silver and Gold from March - Start of September. Silver in Candlesticks, Gold in orange.

Before September, Silver has outperformed Gold year-to-date, and even from its March lows. Year to date, it has returned just under 50%. Meanwhile, Gold has returned 27%. From March, Silver has returned 68%, while Gold only returned 24% from the same period.

Returns for Silver and Gold from the start of September. Silver in Candlesticks, Gold in orange.

However, in September, the equities' market selloff has transferred to both Gold and Silver, hitting Silver incredibly hard. Silver dropped 14% this month, in comparison to Gold, only falling 3.25%. If Gold was a haven turned speculative bull run, Silver was a speculative run on steroids. However, some fundamental factors may show some profit-taking.

Silver woes shining in Investors?

Investors who invest in metals and commodities such as Oil, Silver, and Gold tend to put their capital into ETF backed by metals, instead of buying futures or the physical metal, primarily due to low transaction costs. However, investors have started to take money out of these ETF's, especially Silver backed exchange-traded funds – raising worries that the rally in Silver might be over. IShares Silver Trust ETF has seen a 3% decrease in its silver holdings over the past month to 555m ounces.

The initial case bulls were using to justify the silver trade was its use in Solar Panels. The rally came from the ECB and Joe Biden promoting policies pushing on cleaner power, with the ECB apportioning a large portion of their stimulus package to fighting climate change. However, as risk-off prevailed at the start of this month, investors started to question the actual demand for solar panels at this stage.

Furthermore, with its correlation with Gold, weakness in bull factors for Gold is also associated with a weakness in Silver. Gold is historically associated as a hedge against inflation. With the Fed making it their goal to increase inflation by allowing inflation to go above their 2% mandate, investors and traders question whether they are able to stimulate inflation even amidst their unprecedented rate cuts and quantitative easing.

For now, we've seen a selloff in many risk on assets – so these metals may be a part of that. Will we see further setbacks for the two metals?

Anish Lal did an excellent technical analysis on Gold and its future. You can watch it here.

Gold hasn’t been itself lately

There was this substantial rise in Gold in July. Touted as the "safe haven," many reasons were stated as the reasons for Gold's rise. Inflation, currency debasement, risk-off, etc.

However, I believe we saw three different types of correlations in Gold this year. The first one was the "risk-off" trade. Investors and traders buy up Gold during the equity rout.

The second period combines two very similar mindsets in investment in Gold. The first one can be associated with "institutional money," quoting currency debasement and inflation. The second one comes from retail investors, who have been plowing money into Gold ETF's such as GLD, quoting what institutional investors stated. This pushed a strong bull rally in Gold, as investors and speculators press onto the yellow metal alongside a risk ON market.

Now the gold dynamic has taken a new personality. We saw substantial swings in the equity markets in the last two weeks, with the equity markets diving as of late. However, Gold entered a consolidation – not making the "risk-off" moves we saw earlier this year. This is after Gold sold off near the $2,100 market as investors feared the bull run for Gold had run its course. Is the Gold's silence a sign of more things to come? What other things can we deduce from these three different correlations?

Gold in Blue, S&P 500 in Orange

The silence in Gold highlights its bull run was more on positive sentiment, not the risk off-trade.

The silence during this period, where Gold is supposed to be the outperformer, suggests that the interest in Gold was due to more of a speculative Bull bull run, disguised as the "save haven" trade.

The stretched valuation in Gold may favor bonds in the safe-haven trade

The bull run giving Gold new highs has insinuated investors' minds that Gold is overstretched. Safe-haven assets are supposed to have an inverse correlation with risk-off assets. However, Gold as not exhibited that in the past couple of months. Nor has it exhibited risk-off, "safe haven" characteristics either. Furthermore, safe-haven assets should not have the stigma "oh, its overstretched" – Bonds don't have that stigma or cash.

However, another explanation could be that Gold has been right all along?

An explanation to the rally could be that investors were worried about the potential selloff due to equities' rallying. Therefore, when equities did selloff, Gold was perfectly priced. This is on top of institutional money and general interest in the metal citing devaluation and inflation.

Whatever the reason is, the mentality of whether Gold is overstretched or not should be a trait safe-haven assets should have. If you're looking for a legitimate safe-haven asset, you may want to look in bonds. Or better yet, hold some cash to take advantage of the dip.

Deeper downside for the dollar?

The dollar has seen better days.

Is the US Dollar going to reach a level not seen since 2018?

In the past 124 trading days, only 46 has been in the green for the dollar index.

Many factors have catalyzed this risk off-trend, and unfortunately, I believe even the key fundamental strength for the dollar has slowly diminished away during this pandemic.

Inflation is the dollar's demise.

Inflation in the United States diminishes two things. A) The buying power of the U.S. dollar and B) Real bond yields. Both factors disincentivize investors to hold U.S. dollars. Furthermore, with the Federal reserve implementing a new tool specifically to combat low inflation, it all but guarantees that inflation will rise in the near future, diminishing the U.S. Dollar's power.

Dollar printer.. go brrr...

Federal Reserve's Balance Sheet

The Federal Reserve balance sheet stayed relatively unchanged from 2015 to 2020, dipping below 4.5 trillion near the end of 2020. However, due to the increase of asset purchases to stabilize the financial system, their balance sheet swelled up to 7 trillion at the start of August. The buying back of bonds increases the supply of U.S. dollars in the money market, decreasing the value.

Low-Interest rates have made it cheaper to hedge against the U.S. Dollar.

Many overseas investors, including myself, are pleased to hear dollar weakness as it entails, I will get more U.S. dollars when I convert my New Zealand dollars to fund my brokerage account. However, if I wanted to sell positions and covert it back into New Zealand dollars, chances are the U.S. dollar's weakness will erase a majority of the gains made. However, with low-interest rates, institutional investors have found it cheaper to short the U.S. dollar to hedge their equity positions from further downwards pressure.

"Safe haven" trade has been given to Gold

We saw the U.S. dollar rally against other major currency pairs during the peak of the lockdowns in March as major investors sold off their risk-on assets to hold U.S. dollars. However, as the market reaches all-time highs, the U.S. dollar, with its almost guaranteed diminishing yield, has lost interest from investors in favor of Gold.

This is the main problem for the U.S. dollar. One of the only fundamental strengths that the U.S. dollar has had this year was when there was a rush to hold the greenback in the risk-off period we had in the middle of March/April. However, two things have changed since then:
• Market sentiment has favored Gold in Risk-off days
• "Risk-off "periods like March / April is likely not to occur again

Dollar struggles in the new normal

Coronavirus cases continue to pile up in India, United States, Australia, and Europe – however, investors have continued to plow money into the equity markets. To put this into perspective, cases in the United States have only worsened since the peak of the recessionary period in March / April. However, the NASDAQ is up nearly 30% year to date. If the market is a voting machine, it has voted that the new normal is the Coronavirus running rampant everywhere, including the United States. Therefore, anything better than that should boost equity markets. And can things can worse in the United States with regards to the Coronavirus?

The dollar is experiencing significant headwinds, both qualitatively and quantitatively. Investors do not want to hold it, future headwinds like inflation are destined to push it lower, and its only strength is slowly diminishing.

Bearish bets on the dollar are increasing...

Jack McIntyre from Brandywine Global Investment Management stated that "The dollar has been overvalued for a long time, and this might finally be a catalyst for a multi-year downtrend." Furthermore, he said that "As we've seen before when valuations have been stretched, policy or economic shocks can quickly change the currency's trajectory, and that's what it seems to be happening thanks to the Fed's swelling in the balance sheet, a surge in debt, and the way we handled the pandemic."

...However is likely to hold its status as the reserve currency of the world

Liz Young, from BNY Mellon Investment Management, stated that what we're currently seeing in the U.S. dollar ".. is a pullback.." and that "it is a little too extreme to think the dollar is going to lose its reserve status anytime soon."

Bloomberg also stated that investors and traders are currently net short on the currency, with an increase in demand for puts options on the Bloomberg Dollar Spot Index, cementing a sentiment for a bearish trajectory possibly to a level not seen since 2018.

Anish Lal did an excellent technical overview of the trend of de-dollarisation and its effect on other currencies. You can watch it here.

Gold swiftly shoots past $2,000

Gold finally shoots past $2,000 with geopolitical risk, the coronavirus pandemic, and the recent explosions at Beirut proving to be great tailwinds pushing the metal past the significant psychological level. However, many think it still has legs to run.

Gold in Blue, SP500 in Orange

The yellow metal is up 35% this year, with investors looking for a haven asset that provides a larger return than the current abysmal yields seen from government treasuries. Paul Wong, a market strategist at Sprott Inc, stated, “The stage has been set for Gold to continue to climb higher.” Furthermore, he also stated that “[they] see increased fiscal spending ahead, extremely accommodative monetary policy in place for years and challenging economic recovery.” Gold peaked at $2,055 an ounce as of the 5th of August.

This begs the question – has this become a case of buying Gold for the bull run, buying Gold as a safe haven, or using the fact that people believe Gold is a safe haven as an excuse to buy in the bull run? Technical indicators show that Gold has been deeply overbought, with the 14-day RSI showing a print of 88. Furthermore, although there has been a record influx into Gold ETF’s this year, there is still no sign of Retail Robinhood traders pumping up their positions in these ETF’s like they did Oil ETF’s, Chesapeake or Kodak.

Gold providing Equity like returns

If we believe that the markets paint a picture, it is currently painting an interesting and inconsistent one. As of today:
• Brent Crude broke a psychological price level of $45, hovering a 5-month high
• NASDAQ has been breaking all-time highs – a market which would be considered expensive to many investors has become even more expensive amidst widespread unemployment and significant economic tensions
• Bond yields are the lowest it has ever been, with real yields for treasuries being negative
• The dollar has weakened over 10% since its peak

The market is painting a picture of uncertainty – safe havens are at an all-time high. However, risk assets are also pushing higher. It’s like stating that both long and short bets on the economy are profitable. Furthermore, SocGen strategists commented that “While the correlation between Gold and Equities has turned unambiguously positive since the March lows in risk assets, another serious bout of risk aversion could cause the performances of equities and gold to diverge.”

Furthermore, It is interesting to note that this is what is expected when holding both risk-on assets such as Stocks alongside Gold – they are supposed to be the ballast for each other. However, many investors hold both, while treating Gold as something akin to a risk asset, without the risk. However, this is not what textbooks state Gold should be like. But the returns this year beg to differ.

Anish Lal did an excellent analysis on the GBP/USD - You can watch it here.

Gold reaches unprecedented Territory

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.

Gold prints a high of $1944

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.

In an unprecedented Territory, how do you trade Gold?

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

Happy Trading!

Spot Gold finally pushes past $1,800

Gold finally pushes past $1,800 as retail investors plow $40 Billion into gold-backed funds.

Gold finally pushes past that psychological $1,800 mark

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.

Banks are Bullish on Gold

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.

Gold futures break $1,800

Gold Futures broke $1,800 yesterday, reaching a high of $1,804 on the Comex in New York after a surge of new Coronavirus cases alongside inflationary fears.

Peter Thomas, a senior vice president at the broker Zaner group, states that there has been an “explosion” in demand for Gold, citing virus concerns, inflation, and general market excitement as the metal is up around 20% year to date.

Historically, Gold has been a gainer during periods of quantitative easing and inflation. Furthermore, it has been an excellent ballast for portfolios against market volatility due to the Coronavirus, outperforming bonds. This popularity has been evidently shown by the increase in inflows into Gold ETFs, with over $200 billion flowing into Gold ETF’s like GLD in the first half of 2020. This is in comparison to $326 Billion for the whole year in 2019.

Coronavirus surge in the US may provide upside for Gold

United States record over 48,000 new cases on the July 1st, forcing many states to pull back on their reopening plans. Texas has reduced its restaurant capacity guidelines from 75% to 50%, with New York disallowing indoor dining. Furthermore, Apple stated that they would temporarily re-close 30 stores due to the recent spikes in the Coronavirus.

However, it is not all good news for Gold.

The spot price fell short of breaching the key psychological $1,790 level, hitting $1,789.11 before seeing a sharp drop as equities rallied. This is on the back of the NASDAQ breaking its all-time high, reaching $10,321. Furthermore, FED minutes indicate that they will continue to support the economy, seeing a “highly accommodative” policy in the future. This is on the back of numerous FED announcements, bolstering its stance on helping the US economy at whatever the cost. The FED has stated that QE would be beneficial in the current cycle as its balance sheet surpasses $7 Trillion.

FED's Balance sheet

The stark contrast with what is happening on Main Street and Wall street shows how strong FED stimulus is in helping prop up financial markets, even with grim earnings outlooks. Gold may see some downwards pressure if vaccine tests for the Coronavirus continue to provide positive results, alongside further rallies in the equity markets.

Are you bullish on Gold?

Gold may see $1,800 if there is a second wave

Gold has been rallying in the past couple of days as stocks dip. Threats of a second wave hitting the western countries alongside fears extraordinary quantitative easing will devalue significant currencies have traders and investors seeking refuge.

Gold has been outperforming bonds as the safe ballast as of lately with the Coronavirus pandemic ravaging economies all around the world. To South Korea shutting nightclubs to China, ushering in new restrictions, a second wave hitting Asia is spooking market participants. It is a reminder to many countries coming out of lockdown that the real test has yet to come.

Gold has been rallying in the past three days edging closer to that psychological $1750 mark. This mark has been tested in the past two months, but bulls cannot fully break past it. Unlike oil, there have been many investors turning to physical Gold as a storage of wealth. Due to travel restrictions, Gold has been fighting COVID kits for space on planes due to hedge funds and investments in Gold ETFs craving this age-old storage of wealth. However, hedge funds have been touting a more fundamental reason as to why they believe Gold will increase in value – fears that extraordinary quantitative easing (QE) will devalue significant currencies.

Paul Singer's Elliot Management told his investors that Gold was "one of the most undervalued" assets and that its fair value was "multiples of its current price", citing "fanatical debasement of money by all the world's central banks" and low-interest rates. Has this been the case in past recessionary periods?

Less Quicker Maths

We can take a look at 3 significant instances where central banks implemented quantitative easing: Bank of Japan in 1997, The Federal Reserve in 2009, and the European Central Bank in 2015. For each case, I took the currency that the central bank was situated and paired it with a currency that was not implementing quantitative easing. I took the returns of the currency pair against the returns of Gold a year after the central bank implemented quantitative easing, and attempted to see whether there was a correlation between the two.

Year/Country Currency Pair Correlation
Bank of Japan, 1997 USD/YEN -.50
Federal Reserve, 2009 USD/GBP -.64
European Central Bank, 2015 USD/EUR -.53

The results show that there was a negative correlation between the returns of the currency and the returns of Gold ie. As the currency of the country that was implementing quantitative easing depreciated, the value of Gold appreciated. Suffice to say; these hedge funds may be onto something.

However, a breach of $1,800 may require both a second wave alongside central banks' quantitative easing. But a second wave may wreak havoc in other parts of the market, making a break to the upside in Gold possibly redundant.

Anish Lal did some great technical analysis Gold. You can watch it here.