Gold pauses above $1700 but bullish outlook remains
Head of Commodity Strategy
Summary: Following the dash-for-cash sell off last month gold has rallied strongly to a seven-year high above $1700/oz. Despite the need to consolidate, and with that the risk of another mini correction, our long term view remains firmly bullish. The level of stimulus currently going into the global economy is likely to support gold over the coming years with yield curve controls likely to push real yields deeper into negative territory.
What is our trading focus?
XAUUSD - Spot Gold
XAGUSD - Spot Silver
XAUXAG - Gold-Silver ratio
GDX:arcx - VanEck Gold Miners ETF
GLD:arcx - SPDR Gold Trust
SLV:arcx - iShares Silver Trust
Gold has rallied strongly following the dash-for-cash sell off last month. The latest move above $1700/oz, to a seven-year high, was driven by the US Federal Reserve’s pre-Easter announcement of another $2.3tn bailout. The latest program designed to keep capital flowing amid the COVID-19 pandemic together with the already announced yield curve control will continue to support lower real yields, currently at -0.56%. Especially if the result of all the current central bank initiatives eventually begin to translate into higher inflation.
On that basis investors, especially through exchange-traded funds, have continued to increase exposure to gold. Despite having seen the rally pause above $1700/oz the demand for gold through ETF’s have continued with total holdings reaching a record 2922 tons, up some 345 tons so far in 2020.
Silver meanwhile has following the March collapse recovered strongly towards key resistance at $16/oz. The improved sentiment has been supported by gold’s renewed rally and the recovery among industrial metals. While the global economy is heading into a recession – see note below - with lower demand and rising inventories several metals, such as copper, have found support from coronavirus related supply disruptions.
The March collapse triggered a surge in demand for silver-backed ETF’s with total holdings haven risen by 10% during the past month to reach a fresh record at 20,730 tons. The Gold-Silver ratio has come down to 111 (ounces of silver to one ounce of gold), lower than the +125 record reached last month, but well above the five-year average below 80. In order for silver to continue to narrow its gap to gold the yellow metal needs to rally further, not least due our belief that industrial metals may struggle to recover further, at least in the short term.
While demand for gold remains strong the price action has been somewhat disappointing following last Thursdays bazooka from the US Federal Reserve. It highlights gold’s 2 step forward, 1 step back behavior that has played out throughout the last year. At this stage however short term tactical short sellers have no reason to attack the metal as long it holds onto $1700/oz. Failure to do so could see it retrace lower towards $1680/oz or worst case, in our opinion, $1640/oz.
Our long term view remains firmly bullish with the level of stimulus currently going into the global economy likely to support gold over the coming years. Real yields as mentioned remains one of the key external drivers to watch. With the Fed controlling the yield curve, only an unexpected drop in future inflation expectations and a stronger dollar would change this view.
The current demand is primarily driven by so-called “paper” demand for ETF’s and futures while physical demand from central banks and key countries such as China and India have paused.
Note on the global economic outlook.
Yesterday, the IMF released its latest report on the global economy and the impact of the COVID-19. My colleague Christopher Dembik, Head of Macro Analysis, has written about the findings in this update and some of the main conclusions are:
- The global economy will experience its worst global recession since the Great Depression with a contraction that could reach -3% this year. Both developed and developing countries will contract.
- Only two countries should end the year 2020 with positive GDP growth: India and China, which contribute to 45% of global growth. India is expected to be the fastest-growing major economy (+1.9% this year) followed by China (+1.2%).
- The rest of the world will go through negative growth: United States -5.9%, Japan -5.2%, Russia -5.5% and the European Union -7.5%.
- Asia is expected to suffer zero growth this year for the first time in 60 years.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)