Gold is moving higher in an extremely volatile manner as the broader financial markets fall prey to an edgy 'risk-off' mood. The equity sell-off and declines in US yields positively influenced gold demand last week and should continue to stoke demand this week.
Asian equity markets were sharply lower on Friday, followed by steep declines in Europe and tanking US markets. The bond market was especially supportive of gold as both the 10-year UST and Bund yields fell to near historic lows.
Gold pushed rapidly higher throughout Asia and Europe on reported inventory demand for gold bars from Switzerland and European vaults, which coincided with a headline from a Swiss health official saying that Switzerland is on the brink of an epidemic.
A lower opening in US equities weighed further on risk sentiment and propelled gold towards the $1,700 mark. And with investors focusing on COVID-19 highlight reels, gold simply shrugged off a stellar jobs report.
Global investors continue to show an insatiable demand for all things bullion (ETF paper, scrap, bars and coins), which is running tangentially to both the increase in COVID-19 cases and the anticipated negative economic and financial market impact.
While it's possible that Friday's equity declines eventually triggered margin-related selling, which cut and temporarily reversed gold's gains, it's also likely – according to inside reports – that a colossal producer was hedging gold against the South African Rand, bringing unexpected supply to the market and could have contributed to capping prices on Friday.
But all the elements for further gold gains remain intact.
However, all things being equal – and as equity market continues to sell off as newer Covid 19 cases get reported around the world – we may see more liquidation of gold to cover margin calls. But this does not mean the gold rally is over.
Instead, it's possible more gold buyers will stand in front of these moves given the USD is trading like an echo to the explicitly dovish shift in the Fed narrative; the weaker USD is massively good for gold as the PM traders recentred on the JPY vs. XAU correlation. This key cross-asset relationship has historically been hugely positive for gold prices when both move in tandem to risk aversion (Yen higher, gold higher).
Also, it looks like the Fed will cut rates at the March 18 meeting so, under current circumstances of lower US yields and a weaker US dollar – and even if risk eases modestly – it still looks like gold can go higher, with the next significant level USD1,700/oz. well in reach.
As for the US dollar…
Are we entering a dollar sell-all vortex? It sure seems that way as countries with limited monetary policy flexibility see significant currency appreciation because they cannot cut. Countries with room to cut are getting a weaker currency and lower rates. The currency wars are back on, but the funder countries have no ammunition. Did you see the US 30-year yield on Friday? Wow.
It’s not apparent to me what will stop the USD rout in G10, though an appearance by the BOJ or MOF is increasingly likely as USDJPY tickles below 105.
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In January the Fed needed to put the Taper Genie back in the bottle; now they need to convince the short end crew to back off repricing the Fed Funds strip