Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
Yesterday in our FX research we've tried to find out what investors' expectations on recovery and what markets tell about it. Our investigation shows that investors are too optimistic and undervalue risks of stronger negative effect of pandemic. Other words, the upside bounce that we have now could be just a retracement in a longer-term tendency, but not the end of the crisis yet. And stock market statistics confirms this.
If this is really true, how gold market could behave in this circumstance? By far our common sense view suggests gradual upside continuation by few reasons. First is, other assets loose advantage compares to gold as interest rates drop to zero on all major currencies and it means that bonds yields of all developed countries provide anemic returns, to say the least. Second - overall situation still stands tough. Despite some relief and gradual trend to normalization of common life, world is still far from the destination point. Third - it is blank spot on real effect of pandemic on global economy, which means uncertainty. Outstanding liquidity injections also increase gold value. All these factors, by our view, should support gold price in long-term perspective, especially if we're right on longer-term crisis effect in global economy. As investors could meet negative surprise, it could be psychological rise in gold demand as well, depending on how strong investors will be upset.
Recent data also shows that pandemic effect mostly inflationary rather than deflationary as 3-5 year forward rates and swaps shows higher interest, above 2%. With low rates higher inflation could be gold supportive as well.
Shares of gold miners and funds dealing in the precious metal have rallied in recent weeks as the coronavirus crisis rocked global markets and investors raced to buy safe-haven assets. Spot gold has climbed more than 10% this year, the most among major assets tracked by Reuters and significantly above gains in U.S. Treasury bonds and the dollar, while equities and industrial commodities have borne the brunt of the sell-off, with the MSCI World stocks index and copper prices both down 17%.
As investors debate whether the lasting effect of the virus, which has infected more than 2.6 million people and led to worldwide lockdowns, will be deflationary or inflationary, and as governments throw trillions of dollars at their shuttered economies, gold has emerged as the safe asset of choice. Despite most gold-miners shuttering production under the lockdowns and curfews, their shares have outpaced broader stock indexes this year.
S&P/TSX’s Global Gold index, which tracks producers of gold and related products, including companies that mine or process gold globally, has gained about 20% this year.
Ned Naylor-Leyland, who manages a gold and silver fund at Merian Global Investors in London, expects a boost to gold miners’ operating margins from a rise in the U.S. dollar and the fall in oil prices, which he says comprise 30-40% of miners’ costs. “That is just a pure margin expansion benefit for the company,” he said.
On the back of the rally in gold prices, gold ETFs (exchange-traded funds) saw about $7 billion worth of inflows in March, the highest in more than 8 years, data from Refinitiv Lipper showed. On the other hand, bond ETFs and equity ETFs experienced outflows.
Total holdings in gold-backed ETFs rose to a 7-year high of 1,975.2 tonnes this month, Refinitiv data showed.
Gold prices slipped on Friday as investors booked profits, but concerns over the global economic slowdown and massive stimulus measures from major central banks
kept bullion on track for a weekly gain. For the week, bullion has risen more than 2% so far, after hitting its highest in more than a week on Thursday.
"We are seeing short-term profit taking here in gold," said Tai Wong, head of base and precious metals derivatives trading at BMO. "However, gold is holding well near highs of the move as both retail and institutional investors have been consistently buying as global balance sheets have ballooned and the outlook for the global economy remains extremely uncertain."
The outbreak of the new coronavirus, which has infected more than 2.7 million people globally, has prompted nations to extend lockdowns to curtail its spread, while central banks have unleashed a wave of measures to limit the financial toll. On Thursday, the U.S. House of Representatives overwhelmingly approved a $484 billion coronavirus relief bill, while European Union leaders approved an immediate rescue package of about 500 billion euros.
Gold, a safe investment during times of political and financial uncertainty, tends to benefit from widespread stimulus measures from central banks because it is widely viewed as a hedge against inflation and currency debasement. Indicative of sentiment, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, rose to a near seven-year high, while gold in euros hit an all-time peak of 1,612.39 euros per ounce.
"Gold continues to benefit from this big mix of stimulus that was seen from all over the world. Also the expectations are pretty high that we are not near the end of the stimulus (driven) trade and it is only going to intensify in coming months," said Edward Moya, a senior market analyst at broker OANDA.
Gold prices rose on Wednesday as investors sought safe-havens after an historic slump in oil prices exacerbated fears of a global recession, with most countries remaining locked down in the grip of the coronavirus pandemic.
“On the technical side, there is now quite a solid support zone placed at $1,675 per ounce and a clear break above $1,700 could open space for further rallies,” ActivTrades chief analyst Carlo Alberto De Casa said in a note. “The resistance areas, where we would expect gold to struggle to continue its recovery, are placed at $1,710, at $1,735 and $1,747”
The U.S. Labor Department said 4.427 million more people applied for unemployment benefits last week, taking the total in the past five weeks to a record 26 million, as restrictions to curb the coronavirus outbreak slam the economy.
"The unemployment rate seems poised to hit the 20% level and this alone should be reason enough for the Federal Reserve and Trump administration to keep throwing stimulus into the economy," Edward Moya, a senior market analyst at broker OANDA, said in a note. "Gold's climb towards $1,800 per ounce continues. The stimulus trade is not going away anytime soon and that should mean record highs for gold (in dollar terms) by the summer."
Meanwhile, divided European Union leaders began their search for a joint financial fund of up to 2 trillion euros to help the bloc recover from the pandemic and avoid a collapse in the economies of its poorer southern members.
Another source of risks that we see is the problem of corporate debt globally. Credit spreads wide a lot compares to "normal times" that could mean greater bankruptcy issues that definitely hits stability of corporate bond sector. With rates standing low, this could shift some capital into gold market, as stock market is promised to be depressed for longer time that it is expected right now.
The growing problem of sovereign fragility in EMs might not yet extend to DMs, but there is an issue around corporate debt in some EMs. Returns collapsed as the crisis took hold, but have recovered much of their lost ground in the US and the UK since then: not so in the euro area. On the chart you could see spreads of Investment Grade bonds (BBB and higher):
Fathom believes that markets are underpricing the risk of a more severe economic downturn with a protracted recovery. The relative optimism in markets is driven in part by aggressive monetary and fiscal stimulus across the developed world; the risk is that this stimulus – especially on the monetary side – is sufficient to placate investors but will not be enough to avert crisis in the real economy.
An ominous warning of the risks that continue to brew could be credit markets. Buoyed by the Fed’s unprecedented commitment to outright purchases of US corporate debt, including in the riskier, high yield segment of the market, corporate spreads have remained calm relative to other metrics of market turmoil. As we pointed out \], complacency in corporate debt relative to equity markets has, on several occasions, presaged major credit market events. The sharp freeze on economic activity jeopardising the earnings of an already highly leveraged corporate sector arguably puts credit markets square into the crosshairs of the ongoing COVID-19 crisis. Based on the amount of corporate credit outstanding in the short term, particularly in foreign currency, and therefore at risk of cash-flow crunches, certain European countries appear most at risk. At Fathom, we have held a bearish stance on credit for over a year. We now see the risk that, reassured by the Fed’s monetary splurge, investors are sleepwalking into a nasty downside surprise to unwind their latest cautious optimism.
That's being said, all these factors show no reasons to adjust mid-term expectations on gold market. We suggest it should stand well and show gradual upside performance, with accelerations from time to time, as investors should get "negative" surprises on companies' performance within nearest 12 months and stay aside from massive equity investments. The only limit factor for gold is US dollar that also should stay strong as crisis is lasting more in the future and USD is traditionally treated as safe haven asset. This is the reason why we do not expect explosive rally on gold. Still, XAU/EUR performance could be more aggressive.
Technicals
Monthly
Trend here stands bullish, April month is not closed yet and gold has got power again to return back to the top and above huge doji's top. Close above this level means strong bullish sign. As market is not OB here, it has chances to go higher, especially because lack of any barriers, such as Fib levels. All of them are broken already. Potentially, Gold could climb back to 2000 area to complete doji target, as upside distance should be equal to the doji range. Here we just need to wait for single week to see the close price.
Standing above YPR1 also tells that gold is not in retracement mode, but in longer-term trend continuation. Downside target mostly stands the same - YPS1 and major 5/8 Fib level around 1300 area. But now it is unclear what events should happen to make us consider this scenario.
Weekly
Trend on weekly chart stands bullish as well. And recent performance gives us two important moments. First is, market shows upside action, ignoring weekly overbought level. This is definitely sign of strength and growing demand on gold. At the same time overbought, especially on weekly chart is serious holding factor that limits upside potential of the gold right now.
Last week we've discussed "Shooting star" pattern, that supposedly should become the background for moderate retracement on daily chart. Now gold shows solid upside action, but Star is not erased totally, as price still stands inside its range. These two moments tell that gold has good upside momentum and solid demand, but in short-term it could have problems with upside continuation. Price could make spikes but it will not be able to show real continuation to meaningful levels. More probable is some pullback, or at least, flat continuation around the top, until Overbought will be eliminated.
Daily
Here we're keep watching for the same performance. Last week we've caught sentiment change and called for long entry at both major Fib levels, as it was not obvious that market definitely will hit our major 1635 level. Indeed, gold, after touch of 1670 Fib support has turned up and now is tending higher. As a result, on Friday we've got bullish grabber after effective dynamic pressure performance.
Despite weekly OB level, we suggest that grabber could be completed and gold could try to hit 1770 butterfly target. After that retracement is possible. It means that if you have taken long position last week - you could hold it, just do not forget manage stops and tight them. Bears should wait for patterns and completion of targets first, while those who do not have any longs - nothing could do now and should wait for moderate pullback...
Intraday
On 4H chart gold has completed our minor 1710 pullback, where we also told about possible entry with some fraction of your normal trading position. As we mostly look for butterfly here, it is unclear could price drop more to 1690 level or not. While target is clear and it coincides with daily one at 1770 level. All longs now could be protected by breakeven stop loss, I suggest.
Conclusion
Long-term expectations rise no doubts as gold position stands strong in unstable and blur global environment. In short-term, gold has good upside momentum with solid potential, but price has technical barriers in way of weekly Overbought that prevents strong immediate upside action. It means that we mostly expect right now reaching of near-standing target of 1770 level and moderate pullback after that.
Yesterday in our FX research we've tried to find out what investors' expectations on recovery and what markets tell about it. Our investigation shows that investors are too optimistic and undervalue risks of stronger negative effect of pandemic. Other words, the upside bounce that we have now could be just a retracement in a longer-term tendency, but not the end of the crisis yet. And stock market statistics confirms this.
If this is really true, how gold market could behave in this circumstance? By far our common sense view suggests gradual upside continuation by few reasons. First is, other assets loose advantage compares to gold as interest rates drop to zero on all major currencies and it means that bonds yields of all developed countries provide anemic returns, to say the least. Second - overall situation still stands tough. Despite some relief and gradual trend to normalization of common life, world is still far from the destination point. Third - it is blank spot on real effect of pandemic on global economy, which means uncertainty. Outstanding liquidity injections also increase gold value. All these factors, by our view, should support gold price in long-term perspective, especially if we're right on longer-term crisis effect in global economy. As investors could meet negative surprise, it could be psychological rise in gold demand as well, depending on how strong investors will be upset.
Recent data also shows that pandemic effect mostly inflationary rather than deflationary as 3-5 year forward rates and swaps shows higher interest, above 2%. With low rates higher inflation could be gold supportive as well.
Shares of gold miners and funds dealing in the precious metal have rallied in recent weeks as the coronavirus crisis rocked global markets and investors raced to buy safe-haven assets. Spot gold has climbed more than 10% this year, the most among major assets tracked by Reuters and significantly above gains in U.S. Treasury bonds and the dollar, while equities and industrial commodities have borne the brunt of the sell-off, with the MSCI World stocks index and copper prices both down 17%.
As investors debate whether the lasting effect of the virus, which has infected more than 2.6 million people and led to worldwide lockdowns, will be deflationary or inflationary, and as governments throw trillions of dollars at their shuttered economies, gold has emerged as the safe asset of choice. Despite most gold-miners shuttering production under the lockdowns and curfews, their shares have outpaced broader stock indexes this year.
S&P/TSX’s Global Gold index, which tracks producers of gold and related products, including companies that mine or process gold globally, has gained about 20% this year.
Ned Naylor-Leyland, who manages a gold and silver fund at Merian Global Investors in London, expects a boost to gold miners’ operating margins from a rise in the U.S. dollar and the fall in oil prices, which he says comprise 30-40% of miners’ costs. “That is just a pure margin expansion benefit for the company,” he said.
On the back of the rally in gold prices, gold ETFs (exchange-traded funds) saw about $7 billion worth of inflows in March, the highest in more than 8 years, data from Refinitiv Lipper showed. On the other hand, bond ETFs and equity ETFs experienced outflows.
Total holdings in gold-backed ETFs rose to a 7-year high of 1,975.2 tonnes this month, Refinitiv data showed.
Gold prices slipped on Friday as investors booked profits, but concerns over the global economic slowdown and massive stimulus measures from major central banks
kept bullion on track for a weekly gain. For the week, bullion has risen more than 2% so far, after hitting its highest in more than a week on Thursday.
"We are seeing short-term profit taking here in gold," said Tai Wong, head of base and precious metals derivatives trading at BMO. "However, gold is holding well near highs of the move as both retail and institutional investors have been consistently buying as global balance sheets have ballooned and the outlook for the global economy remains extremely uncertain."
The outbreak of the new coronavirus, which has infected more than 2.7 million people globally, has prompted nations to extend lockdowns to curtail its spread, while central banks have unleashed a wave of measures to limit the financial toll. On Thursday, the U.S. House of Representatives overwhelmingly approved a $484 billion coronavirus relief bill, while European Union leaders approved an immediate rescue package of about 500 billion euros.
Gold, a safe investment during times of political and financial uncertainty, tends to benefit from widespread stimulus measures from central banks because it is widely viewed as a hedge against inflation and currency debasement. Indicative of sentiment, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, rose to a near seven-year high, while gold in euros hit an all-time peak of 1,612.39 euros per ounce.
"Gold continues to benefit from this big mix of stimulus that was seen from all over the world. Also the expectations are pretty high that we are not near the end of the stimulus (driven) trade and it is only going to intensify in coming months," said Edward Moya, a senior market analyst at broker OANDA.
Gold prices rose on Wednesday as investors sought safe-havens after an historic slump in oil prices exacerbated fears of a global recession, with most countries remaining locked down in the grip of the coronavirus pandemic.
“On the technical side, there is now quite a solid support zone placed at $1,675 per ounce and a clear break above $1,700 could open space for further rallies,” ActivTrades chief analyst Carlo Alberto De Casa said in a note. “The resistance areas, where we would expect gold to struggle to continue its recovery, are placed at $1,710, at $1,735 and $1,747”
The U.S. Labor Department said 4.427 million more people applied for unemployment benefits last week, taking the total in the past five weeks to a record 26 million, as restrictions to curb the coronavirus outbreak slam the economy.
"The unemployment rate seems poised to hit the 20% level and this alone should be reason enough for the Federal Reserve and Trump administration to keep throwing stimulus into the economy," Edward Moya, a senior market analyst at broker OANDA, said in a note. "Gold's climb towards $1,800 per ounce continues. The stimulus trade is not going away anytime soon and that should mean record highs for gold (in dollar terms) by the summer."
Meanwhile, divided European Union leaders began their search for a joint financial fund of up to 2 trillion euros to help the bloc recover from the pandemic and avoid a collapse in the economies of its poorer southern members.
Another source of risks that we see is the problem of corporate debt globally. Credit spreads wide a lot compares to "normal times" that could mean greater bankruptcy issues that definitely hits stability of corporate bond sector. With rates standing low, this could shift some capital into gold market, as stock market is promised to be depressed for longer time that it is expected right now.
The growing problem of sovereign fragility in EMs might not yet extend to DMs, but there is an issue around corporate debt in some EMs. Returns collapsed as the crisis took hold, but have recovered much of their lost ground in the US and the UK since then: not so in the euro area. On the chart you could see spreads of Investment Grade bonds (BBB and higher):
Fathom believes that markets are underpricing the risk of a more severe economic downturn with a protracted recovery. The relative optimism in markets is driven in part by aggressive monetary and fiscal stimulus across the developed world; the risk is that this stimulus – especially on the monetary side – is sufficient to placate investors but will not be enough to avert crisis in the real economy.
An ominous warning of the risks that continue to brew could be credit markets. Buoyed by the Fed’s unprecedented commitment to outright purchases of US corporate debt, including in the riskier, high yield segment of the market, corporate spreads have remained calm relative to other metrics of market turmoil. As we pointed out \], complacency in corporate debt relative to equity markets has, on several occasions, presaged major credit market events. The sharp freeze on economic activity jeopardising the earnings of an already highly leveraged corporate sector arguably puts credit markets square into the crosshairs of the ongoing COVID-19 crisis. Based on the amount of corporate credit outstanding in the short term, particularly in foreign currency, and therefore at risk of cash-flow crunches, certain European countries appear most at risk. At Fathom, we have held a bearish stance on credit for over a year. We now see the risk that, reassured by the Fed’s monetary splurge, investors are sleepwalking into a nasty downside surprise to unwind their latest cautious optimism.
That's being said, all these factors show no reasons to adjust mid-term expectations on gold market. We suggest it should stand well and show gradual upside performance, with accelerations from time to time, as investors should get "negative" surprises on companies' performance within nearest 12 months and stay aside from massive equity investments. The only limit factor for gold is US dollar that also should stay strong as crisis is lasting more in the future and USD is traditionally treated as safe haven asset. This is the reason why we do not expect explosive rally on gold. Still, XAU/EUR performance could be more aggressive.
Technicals
Monthly
Trend here stands bullish, April month is not closed yet and gold has got power again to return back to the top and above huge doji's top. Close above this level means strong bullish sign. As market is not OB here, it has chances to go higher, especially because lack of any barriers, such as Fib levels. All of them are broken already. Potentially, Gold could climb back to 2000 area to complete doji target, as upside distance should be equal to the doji range. Here we just need to wait for single week to see the close price.
Standing above YPR1 also tells that gold is not in retracement mode, but in longer-term trend continuation. Downside target mostly stands the same - YPS1 and major 5/8 Fib level around 1300 area. But now it is unclear what events should happen to make us consider this scenario.
Weekly
Trend on weekly chart stands bullish as well. And recent performance gives us two important moments. First is, market shows upside action, ignoring weekly overbought level. This is definitely sign of strength and growing demand on gold. At the same time overbought, especially on weekly chart is serious holding factor that limits upside potential of the gold right now.
Last week we've discussed "Shooting star" pattern, that supposedly should become the background for moderate retracement on daily chart. Now gold shows solid upside action, but Star is not erased totally, as price still stands inside its range. These two moments tell that gold has good upside momentum and solid demand, but in short-term it could have problems with upside continuation. Price could make spikes but it will not be able to show real continuation to meaningful levels. More probable is some pullback, or at least, flat continuation around the top, until Overbought will be eliminated.
Daily
Here we're keep watching for the same performance. Last week we've caught sentiment change and called for long entry at both major Fib levels, as it was not obvious that market definitely will hit our major 1635 level. Indeed, gold, after touch of 1670 Fib support has turned up and now is tending higher. As a result, on Friday we've got bullish grabber after effective dynamic pressure performance.
Despite weekly OB level, we suggest that grabber could be completed and gold could try to hit 1770 butterfly target. After that retracement is possible. It means that if you have taken long position last week - you could hold it, just do not forget manage stops and tight them. Bears should wait for patterns and completion of targets first, while those who do not have any longs - nothing could do now and should wait for moderate pullback...
Intraday
On 4H chart gold has completed our minor 1710 pullback, where we also told about possible entry with some fraction of your normal trading position. As we mostly look for butterfly here, it is unclear could price drop more to 1690 level or not. While target is clear and it coincides with daily one at 1770 level. All longs now could be protected by breakeven stop loss, I suggest.
Conclusion
Long-term expectations rise no doubts as gold position stands strong in unstable and blur global environment. In short-term, gold has good upside momentum with solid potential, but price has technical barriers in way of weekly Overbought that prevents strong immediate upside action. It means that we mostly expect right now reaching of near-standing target of 1770 level and moderate pullback after that.
