On Tuesday, as risk sentiment rose and the dollar rallied, the price of gold fell sharply, hitting lows not seen since late July and once falling through the psychological $1,800 barrier. A series of positive news about vaccines has been suppressing gold prices, but TD Securities pointed out that outflows from safe-haven assets are “misguided”.
“We reiterate that it was a mistake to withdraw funds from gold ETFs and that the vaccine will ultimately be a boon to gold investors, as the Fed will attempt to stimulate inflation above target for several years under its flexible average inflation targeting regime. Coupled with nominal interest rates remaining essentially unchanged, vaccines should help push inflation expectations higher, thereby benefiting gold prices.”
I. Investors are “led” by vaccines, ignoring a major anomaly
Daniel Lacalle, chief economist at hedge fund Tressis, says investors have been passively following the positive vaccine news without really understanding and analyzing the risks that could emerge in the coming months. He said.
The market only sees the positive side of the story, but does not consider the problems that will be encountered if vaccines are widely distributed. There is a complete disconnect between the high risk sentiment of the average investor and the path forward for vaccines, which are complex to store and transport. My most optimistic estimate is that less than 38% of the population will have access to vaccines by the end of 2021.
For the rest of the 2020s, investors will be torn between the hope offered by vaccines and the rising number of cases. Since the outbreak began in the U.S., November has accounted for about a quarter of all new cases. The healthcare system is under tremendous pressure, with at least 83,000 new coronary pneumonia patients hospitalized, and that number continues to rise.
Oddly enough, risk appetite is heating up, with Bank of America’s monthly survey reporting that the level of cash in portfolios has fallen to 4.1%, the lowest level since January.
The cash level, defined as the percentage of total mutual fund assets held in the form of cash or cash equivalents, is an important aspect of maintaining mutual fund liquidity. Most mutual funds maintain a 5 percent cash level to process trades and to operate daily closeouts.
The Federal Reserve’s action is the number one factor that dominates the price of gold.
Anna Golubova, an analyst with the bullion analysis site Kitco, warns that most of the positive news about vaccines is already fully priced in. However, there is more bad economic data ahead. She argues that.
“Whether the ‘vaccine market’ will continue or stop in the coming weeks is still unknown. What is clear, however, is that much of the good news has been digested early, yet the economic damage from the second and third waves of the epidemic has yet to be felt. Fiscal and monetary policy should continue to play an important role in preventing a deep recession, and investors should closely monitor the actions of fiscal and monetary policymakers until we are confident that the economy can function on its own without assistance.”
So this week’s focus will be on Thursday’s release of the minutes of the Federal Reserve’s November monetary policy meeting. TD Securities predicts that the market is watching closely for any changes in the Fed’s language before then as expectations rise for the Fed to introduce reforms at the upcoming December rate decision. TD Securities believes that.
“The market will be watching for any discussion of extending the weighted average duration of U.S. Treasuries. We expect the Fed to apply this QE model, which could prevent massive outflows from gold ETFs.”
Market analyst Hussein Sayed says any changes to the Fed’s asset purchase program will be key to watch closely.
“The Fed may increase the amount of Treasuries it buys, currently at $80 billion a month, and even extend the maturities of the bonds it buys further. But fiscal support is the key to preventing another sharp downturn in economic growth.”
The Federal Reserve is increasingly concerned about the lack of fiscal stimulus, so the likelihood of adjusting QE policy next month to help keep long-term yields down will increase, according to the Global Monetary Strategies group at BBH, the oldest private bank in the U.S. The Fed is increasingly concerned about the lack of fiscal stimulus, so it will adjust QE policy next month to help keep long-term yields down.
Vaccines kill viruses, but not huge debts
Ole Hansen, Head of Commodity Strategy at Saxo Bank, also sees inflation and long-term debt as powerful catalysts to push gold prices higher.
“Vaccines can kill viruses, but they cannot kill the huge debt accumulated this year. Central banks are expected to maintain an ultra-loose monetary environment for years, which may inevitably lead to the risk of higher inflation.”
Matthew Hornbach, chief interest rate strategist at Morgan Stanley, wrote in a report that the active risk environment will present unforeseen obstacles that current central bank policy to continue balance sheet expansion is designed to prevent.Hornbach expects the balance sheets of the four largest central banks to rise to $30 trillion in two years from the current $25 trillion.
Below shows the monthly QE forecasts for the eight more active central banks in 2021, which Daimler expects will purchase an average of $304 billion in bonds per month ($238 billion of which is government bonds). The Federal Reserve and the European Central Bank will make the largest bond purchases.
According to the International Finance Association, total global debt will reach $360 trillion by 2030, up from $277 trillion at the end of 2020, or $85 trillion above current levels.
“Helicopter money” will become the global norm. And hedge funds haven’t given up on gold and silver, but rather see them as a hedge against rising inflation expectations.
As of November 17, the CFTC position report shows that gold net long positions increased 11,534 hands to 251,270 hands, of which long positions increased by 11,182 hands, short positions decreased by 352 hands; silver net long positions although slightly reduced by 214 hands, but the total 45,614 hands is still at a high level since the end of July, bullish willingness to warm up.
Commodity strategist Ole Hansen pointed out that gold’s fall below the $1,850 support is a signal worth buying, and in general, vaccines do not mask the positive fundamentals for gold.
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