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Asia Open | FX & Gold: Out of the fire into the frying pan with trade war tensions rising as pandemic health concerns begin to ebb

Market Analysis / 4 Min Read
Stephen Innes / 25 May 2020

Trade war tensions are on the rise just as concerns over the health pandemic have started to ebb, which should continue to hold a bid under gold prices over the short term, supported by the bullish cocktail of economic, trade and geopolitical factors.
 
Beijing dropped the references to its annual growth target for the first time at the beginning of Parliament, which is signalling more economic uncertainty and reinforced gold demand.
 
Gold could maintain gains in the face of a firmer USD because both are viewed as 'safe havens'.
 
Physical uptake has been slow of late but regional Asian hubs reportedly had an uptick on demand last week, possibly on the back of rising US trade tensions. 
 
Gold ended the week slightly lower from the week before, despite a rise in geopolitical tension in Hong Kong and a hefty chunk of trade war risk premium getting packed into the overall equation. This could be due to the futures rollover date as no one wants to take delivery of physical with demand low.
 
The market is exceptionally long gold futures, either as a speculative bet or as a hedge to cover the enormous build in Gold ETF. And with moderate demand for physical, funds will be forced to roll June/August where I’d expect the roll spreads to widen. The discount of the most-active futures to the second most active has already swelled to the biggest since 1981, a sign that more buyers want to roll into later contracts rather than take physical delivery of the metal.
 

Gold ETF
 
On the advice of financial advisers and probably convinced by some Wall Street guru getting media space in tier one publications, investors have poured unprecedented amounts of cash into gold exchange-traded funds.

Sadly, most of these investors remain blind to the volatility in gold, lack of liquidity in COMEX, its correlation to deflation, or the fact that gold is not as safe a haven hedge for stocks as gold ETF promoters preach.
 
It’s bizarre how the social media narrative runs that the new wave of gamblers investing in the relatively low volatility stock markets is risky, but betting on gold in a higher stakes game as far as volatility is concerned is okay.

With the regulator's footprint all over the USO oil ETF, I wonder how long it will be before they stamp down on Gold ETF's. The scary thing is that now retail investors are the perma bid on gold markets via gold-backed EFT. Unquestionably, these media stories touting the build-in EFT are little more than advertorials for State Streets SPDR gold ETF. Simultaneously, they’re devoid of any objectivity on gold volatility, and sadly they’ll likely trigger more and more buying from more unsophisticated investors. But for big speculators that can ramp up margins on paper gold in a hurry, it provides excellent fodder for a long squeeze while delivering a rather good target for the deflationary gold bears.
 
Currency markets
 
Absent a clear directional bias for the dollar, which is shifting on the ebb and flow of risk markets, traders continue to tread lightly. And they’ll step even more gingerly today, given the many holidays around the world and lack of liquidity in primary markets.

With central banks now basically de facto government financing vehicles, inflation targeting is just a façade and it’s virtually impossible to use Central Bank guidance in the currency outlook equation. Asia traders will continue to focus on the Yuan, which is the primary benchmark for local risk markets and the all-vital trade war barometer for global markets.

The Yuan watch
 
There are mounting tensions on multiple fronts, trade tensions notwithstanding. In mainland China, news from the first day of the NPC suggested regulators were far lest dovish than market positioning mostly because the group decided not to set a GDP growth target for this year, and other goals for government support were more foggy than usual. All of which suggests there will be a lingering bid in USDCNH likely for weeks to come. But if China and even HK stocks turn a darker shade of red, and with USDCNH breaking through the key 7.15, it suggests the risks remain skewed to the topside as markets price a higher risk premium on trade war risk, potentially leading to further portfolio outflows. 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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