From Liquidity to Solidity – Bullion Booms
While market participants stare at stocks with open eyes and dropped jaws as they rise in the face of re-emerging virus cases and geopolitical tensions, one solid trend that is making fresh highs is Gold. Central Bank liquidity provisions have supported the hard currency which is now at an all-time high when measured equally against the world’s four most important paper currencies – USD, EUR, JPY, CNY.
This has emerged while the USD has been both up and down over the past week, further highlighting Gold’s strength.
There are two ways of reading this – is the Gold rally warning of trouble ahead? Or is it simply continuing its path given the extra-ordinary monetary easing? The bias here is the latter rather than the former.
Why? A second round of virus infections should not be as surprising as the first when many countries were simply unprepared. To be caught offside again in the same manner would almost be “criminal” and unlikely i.e. the worst of the coronavirus is behind us. With respect to geopolitical tensions, they have had little impact on local financial markets. There is nothing out of the ordinary happening in Korean or Indian markets for example. On the monetary policy front, it is far too soon to be talking about whether recent measures are temporary or not. The belief here is that they will not be short lived enough to be called temporary despite central bank rhetoric (the language is no different to 11 years ago post Lehman Brothers). Instead, as there is increasing discussion of the rather desperate sounding measures to control the yield curve in the US, asset markets will remain in uptrends as will Gold.
The equally weighted Gold-G4 Index, below, suggests a rally of approximately 11%-14% from here. A simple extrapolation on XAUUSD would put us around $2,000. However, if everything is rising then something must fall and that something is the US Dollar. As the USD downtrend re-asserts itself, the $2,000 target may be a conservative estimate and we will probably go even higher before the year is out.
Source: Aspen Graphics / Bloomberg
The chart above is of the past 2 years. The breakout to new highs this week suggests a rally of more than 11% before year end in favour of Gold versus the four major paper currencies of the world.
Source: Aspen Graphics / Bloomberg
A falling USD-Index would accelerate the uptrend on XAUUSD and likely take it above $2,000 before year end.
SKA
One thought on “From Liquidity to Solidity – Bullion Booms”
Ample liquidity and crowding out of yielding assets due to central banks leaving a question mark on paper money, as expressed through the G4 index overlay.
Additionally anaemic EM growth, even before the crisis, is putting debt ratios under scrutiny as fiscal spending is rising.
Leaving gold as a destination.
The bearish DXY outlook gives an additional push for commodities even in absence of a more severe 2nd wave.