Yellow Metal Heading Skyward Caxton <currency@news.caxtonfx.com>
Subject: Gold Bugs Rejoice, the Yellow Metal is Heading Skyward
Date: 27 July 2020 at 07:57:33 BST
Daily Market View
27th July 2020
1-Minute Market Rundown
• A combination of factors – including the unstable outlook and historically low real yields – have propelled gold to within inches of its record high; but the rally looks set to continue further
• Looking ahead, this week will be one of the most important weeks of the year so far; with the US approaching the ‘fiscal cliff’, a bumper calendar of earnings awaiting, a busy week of economic data, and the coronavirus continuing to loom large
Gold Bugs Rejoice, the Yellow Metal is Heading Skyward
For only the fourth time in history, spot gold rose above $1,900/oz on Friday, extending its recent rally into a 6th consecutive day, while notching a 7th straight weekly advance, and its best week since late-March; bringing the precious metal to its best levels since late-2011.
It is, in fact, these levels that are now the only resistance left for gold, namely the previous record high - set in September 2011 - at $1,921/oz; above that, we are truly in uncharted waters. Should the yellow metal continue its recent run, which shows no signs of stopping, those record highs should be taken out in relatively short order, perhaps even this week.
So, what is causing the rush into gold, and is it likely to continue?
Chiefly, we must consider gold's status as a safe-haven, and perhaps the best-known and most-loved safe-haven throughout history. You don't need me to tell you that we are presently living through incredibly uncertain times, the data below backs up this point, hence it is no surprise to see investors flocking into gold.
Despite the initial panic-stricken days of March fading, and giving way to a somewhat clearer economic situation, gold remains well-bid; this is both due to the still unclear economic outlook, as well as the subsiding of panic itself, which means investors are somewhat more content to dip back into the market, albeit into safer assets, rather than liquidating portfolios as was seen a few short months ago.
Meanwhile, gold continues to maintain an incredibly tight correlation with real Treasury yields (yields minus the inflation breakeven). The below shows the 10-year TIPS yield (inverted) plotted against gold, and rather speaks for itself.
The decline in real yields has come about due to a number of factors, including a 'flight to safety' bid into bonds, disinflation and sharply declining inflation expectations, and 'QEInfinity' from global central banks conducting asset purchases on an unprecedented scale.
Speaking of debt, and monetisation of debt - which central bank policy is verging on at the moment - that is another reason that has propelled the precious metal close to all-time highs. Typically, when government borrowing binges act as a positive catalyst for gold, and history is repeating itself this time around. Increased issuance, and perhaps concern that debt levels will become unsustainable requiring devaluation of currency in the future, are like a red rag to gold bulls.
Finally, and in a similar case to what is propelling stocks higher at the moment, we must consider the alternatives to gold. Those seeking both safety and a decent yield, only have one real option at the moment - with Treasury yields rooted near zero, and negative in real terms, and cash earning nothing. The 'TINA' theory - there is no alternative - is the final factor propelling the precious metal skyward.
Importantly, none of these factors are likely to change any time soon, with the environment set to remain uncertain, yields set to remain low, and issuance set to remain high. As such, the bull case for gold remains firmly intact.
Furthermore, even if the outlook were to dramatically shift, and inflation become a much higher risk, gold would likely shift from becoming an uncertainty hedge to an inflation hedge, thus maintaining the bull case.
As such, fresh record highs and $2,000/oz are firmly in sight.