Goldex Heartbeats: Gold hits highest level since 2012

Goldex Team

Editorial content

For the first time since 2011, the year of the European Sovereign Debt Crisis, Gold traded above $1,800 per oz. The combination of increasing Covid-19 cases in many different areas (Australia, UK, Texas, Switzerland and others) and thus the reliance on Central Banks and Governments to support the economy have helped Gold reach this milestone.

An explicit example of such support can be seen below:

US Federal Reserve bond ETF holdings:

  • Now own $6.8bn market value in corporate bond ETFs, of which LQD, VCSH, VCIT, and IGSB are the top holdings.
  • The Fed now has a position in 16 ETFs.
  • According to Bloomberg data, following the H10 filing by the central bank, the Fed is a Top 5 holder in some of the biggest bond ETFs:
    • including the biggest Investment Grade ETF (LQD) where the Fed is now the 3rd largest holder,
    • the Vanguard Short-Term Bond ETFs (VCSH), where the Fed is the 2nd biggest holder
    • and Vanguard Intermediate-Term Corporate Bond ETF (VCIT), where the Fed is the 5th biggest holder.
    • The Fed is also the 5th biggest holder of the junk bond ETF (JNK).

Even as recently as two years ago the majority of commentators would say that the above was impossible. But for central banks, the mantra “if they can, they will” must always be applied. The next potential policy – albeit very controversial – is the Yield Curve Control, also known as YCC. As Simon Flint writing for Bloomberg says:

‘Market participants may regret dismissing the chances of the Federal Reserve turning to yield curve control (YCC). It’s likely on the agenda for 2020 and the consequences will be widespread across financial assets.’

Gold Market Zeroes In on Curve Control After Futures Top $1,800

 

Yield Curve Control by Acropolis have a good primer worth exploring while FX Empire have a good piece on why YCC will be bullish for gold:

Why Yield Curve Control by the Fed Will Be Bullish for Gold

Away from the machinations of the Central Banks, in the real world, there are other positive signals for potential further gold price appreciation this week.

China’s new security law in Hong Kong and its implementation overnight, much to the severe condemnation from the international community:

Hong Kong: First arrests under ‘anti-protest’ law as handover marked

China draws condemnation for new Hong Kong security law

The severity of this move must not be underestimated. Ian Duncan-Smith, writing in the Telegraph calls China’s actions:

‘This latest assault on Hong Kong’s law and freedoms, constitutes a legal Tiananmen Square moment for the free world. The Communist Party of China sees the effect on Hong Kong’s status as collateral damage in the greater clash of values which the Chinese government believes it must win.

I wonder, does the free world recognise that we may even now have arrived at this generation’s 1936 moment, when Germany occupied the Rhineland, and the world looked away?

In my lifetime I find it hard to recall a more breathtaking piece of authoritarian overreach.’

Hong Kong’s plight is a Tiananmen Square moment for the free world

Strong words, but this response is calculated by the British Government and will make a lot of people globally very nervous about China. The effect on Hong Kong will be catastrophic as an exodus of its citizens begin. Taiwan is already helping asylum seekers and the British government has responded by assisting people as well. For the Hong Kong economy this exodus of human capital will put an end to what was seen as a real success story. All eyes turn to Taiwan to see what happens next. Is this the first major move of an expansionary China?

Furthermore the economic news – especially job losses – have been worrying. Here is a sample, provided by Euronews:

  • BP: 10,000 Job losses
  • Swissport: 4556 Job losses
  • Renault: 15,000 Job losses
  • Airbus: 15,000 Job losses
  • Lufthansa: 22,000 Job losses

Coronavirus job cuts: Which companies in Europe are slashing their workforces because of COVID-19?

And this list is hardly comprehensive. Nor does it recognise all of the repercussions from such job losses on other stakeholders; clients, investors, supply chains and service providers. Thus, it will be politically impossible for governments not to provide more support, direct to the unemployed. Expect expansion of furlough schemes, and creation of new schemes across the world as the economic reality starts to hit. And this is before any real second wave, or even third wave hits.

In this new world, where lockdowns can happen in an instant and where the economy is more and more controlled and directed by governments and central banks the demand for Gold will only increase. The world faces a period of uncertainty due to the Corona Virus but has also got to come to terms with a more assertive China that has its own global ambitions. Global power politics has returned for the first time in over three decades in the midst an global pandemic that has shutdown much of the global economy. It is no surprise Gold is moving higher. The only surprise is that it hasn’t moved higher still.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.