Gold Weekly: Gold's Lustre at the Mercy of Central Banks

Market Analysis /
Stephen Innes / 14 Oct 2019

Turning point 
Until May 2019, gold was meandering along and starting to lose its appeal. Then it made explosive gains on a confluence of Fed rate cuts, the inversion of the US yield curve, easy global monetary policies, the deluge of negatively yielding sovereign bonds globally, escalating trade and geopolitical risks, and stock market wobbles. The combination of these factors created sufficient investor uncertainty to trigger significant "safe-haven" demand into gold.

 Source: AxiTrader 

Gold's primary drivers 
Low yields and elevated levels of sub-zero yielding sovereign bonds are incredibly supportive for gold as they reduce the opportunity cost of owning bullion. 
Ongoing easy monetary policies will likely support gold.

Fed policy is the key
The Federal Reserve Board is expected to cut interest rates at least one more time in 2019, but a Fed cut in October is essential for gold momentum as it then opens the door for another rate cut in December, if warranted. But if the Fed indicates a hawkish rate cut, or doesn’t cut rates in October, gold could struggle.

Source: CME Watch Tool

Global central bank policy 
Other global central banks from Sydney and Tokyo to Beijing and Frankfurt are expected to ease monetary policy further which will likely continue to support Gold, albeit much of this narrative being packed into the rates curve and possibly heavily factored into gold forward prices. Therefore, this might be less of a bullish influence going forward.

Some central banks are now questioning the effectiveness of lowering interest rates below 1% while others who are below the zero lower bound are increasingly looking for the government to do their share of the heavy lifting. This may not support gold as a shift to the fiscal policy could send bond yields higher and lessen gold’s opportunity costs. 

US yield curve 
Both the shape of the US yield curve and the absolute level for the US 10-year treasury yields could be the key for gold's next significant rise. Yield curve inversion is excellent for gold sentiment as it will be a move below 1.5 % in the 10-year US treasury yields which will trigger safe-haven demand and support gold, while a flat yield curve reduces the opportunity cost of owning gold.
But a shift in the Fed monetary stance to an easing bias will go a long way to lowering bond yields and extending the Gold rally in 2019. A Fed shift to and explicit easing bias is critical for higher gold prices for the remainder of 2019.


Gold as a haven
Gold is the focus of "safe-haven" demand. Ongoing trade and geopolitical risks, which have exponentially increased this year, have seen massive flows funnel into ETF and COMEX gold positions. 
A trade war detente and a Brexit deal take the shine off gold’s appeal. However, geopolitical risk, which is gold positive, is expected to rise in 2020 as Middle East hotspots and global waves of populism continue to dot the global landscape. Given increased financial market uncertainties and the ongoing global economic slump, gold may remain supported in the face of trade war detente and as Brexit mercifully ends in a deal. 
Central Banks
The great thing about central bank demand is the purchases sit in the gold vault doing little more than collecting dust with little to no threat of that supply coming back to the market anytime soon.
Central banks’ gold demand jumped sharply in 2018, rising to 657t, a 75% increase from 2017. The bulk of central bank purchases in 2018 were initiated by just a few nations: Russia, Turkey, and Kazakhstan. That said, a total of 24 central banks bought gold in 2018, some of them for the first time in decades. But it was The Peoples Bank of China gold purchases that caught the market attention in late 2018 and they’re expected to diversify their reserves away from the USD and negative EU bond yields, back into Gold, throughout the rest of 2019 and well into 2020. 
Beginning in 2010, Central Banks around the world turned from being net sellers of gold to net buyers. In 2018, official sector activity rose 46% to 536 tonnes of purchases – the second-highest level of demand this century, according to the GFMS Gold Survey.


Gold positions 

Record higher net long positions on the Comex and robust ETF accumulation has been the stamp of authenticity for this year’s gold rally as investors shift into gold in response to heightened financial risk and lower bond yields. But these significant open positions leave gold investors extremely prone to profit-taking which could add a layer of position uncertainty heading into year’s end.


Bloomberg Gold ETFs Post Longest Run in a Decade as Investors Take Cover


This Weeks Drivers

  • Fed Speak
  • Wednesday's US retail sales and Thursday's industrial production reports will be the critical focus for Fed policymakers.
  • Yuan Fix, how far below 7.07
  • US Ten Year Bond Yields
  • China’s Data Dump
  • Bank of Korea and MAS Forward Guidance
  • The US Dollar

 AxiTrader” in the news” on Gold
Reuters, Oct 7, 2019: Gold treads water as focus shifts to China-US talks, Fed minutes
“Gold continues to get appraised against the U.S. bond yields and what the Federal Reserve is going to do next,” said AxiTrader market strategist Stephen Innes in a note.
“So, while price action seems supportive enough to suggest a long bias remains intact, ... market participants likely need further evidence from the Fed Board that they are shifting to an easing bias to push prices significantly higher.”

Business Times, Oct 10, 2019: The herd of bulls could push gold past US$1,600 per ounce

AxiTrader's Asia-Pacific market strategist Stephen Innes said: "the markets are pencilling in one more rate cut this year but three more next year. Ultimately the 10-year US bonds trading could trade at 1.25 per cent in that situation. However, Gold will struggle to make explosive gains if the US 10-year bonds remain above 1.5 per cent, so the metal needs a lot of help from a weaker US economy."

Read more market views from Team AxiTrader:

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