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Gold reaching for the stars, structural bid in gold driven by a real rate suppression from central banks

  • Gold is reaching to the stars and is fundamentally biased to the upside.
  • Risk-off flows giving the bulls a kick start again, eyes on a break of US/Iran 2020 highs.

The price of gold has extended gains and returned to test the start of the year and Iran/US highs. At the time of writing, gold trades at $1,607.66 having climbed between a low of $1,599.65 and $1,611.24. Risk appetite returned to financial markets mid-week as the established trend of buying dips continued.

The US dollar picked up a bid again on economic data as well as safe-haven flows, with the DXY rising to around a 45-month high. More on that here:  US Dollar Index Price Analysis: DXY unstoppable ahead of FOMC, trading near 45-month highs

Elsewhere, in related markets, the S&P500 made a new high overnight, buoyed by China’s stimulus measures. The key event for the US dollar came in the Federal Reserve Minutes, although they dropped no bombs on markets, resulting in a muted response in the FX and precious metal's space.

  •  FOMC minutes: Policymakers expect economic growth to continue at a moderate pace

However, for the remainder of the week, we have the Philadelphia Fed survey which is often seen as the most representative barometer of regional manufacturing given the mix of industries in the Philadelphia Fed region. "Expectations look for it to fall back to 11.0 vs 17.0, which if confirmed, would raise concerns about the impact of COVID-19 on US output," analysts at ANZ argued, adding, "PMI data are due on Friday so we will have a better sense of how resilient the US is proving to be by the end of the week."

Where to from here?

  • Coronavirus peaking? How will it impact the global economies and FX?

Technically, gold is meting a headwind and seasonalities could play into the bear's hands at the end of this month. Should the coronavirus risks tail off, then we could see the case for the downside playout again for safe havens.  We are already seeing a strong bid in the CRB index, WTI and a spike in copper's correction beyond a 38.2% retracement would likely confirm the medium-outlook's bullish case for commodities. 

"In hindsight, our view that we've reached peak coronavirus fear is being strengthened," analysts at TD Securities argued. "Base metals have broadly recovered off their early February lows, with energy markets following suit and global equities are also trading firmly higher — but gold is still charging toward multi-year highs."

The analysts at TD Securities argued that the "safe-haven demand may have provided a temporary boost to marginal demand, and Russian sanctions may also be intensifying near-term demand for the yellow metal, but the structural bid in gold is driven by a real rate suppression from global central banks...The world is awash with liquidity, and the bar for further central bank support is far lower than for rate hikes — global central banks' asymmetric reaction function will continue to support gold through 2020."

Gold levels

 

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