Gold continues to be under pressure. The key level of USD1800 needs to hold. This broke briefly for a few days though recovered quickly.
Why the weakness?
First of all, global stock markets were rampant in November. There were record highs across the board. The Russell 2000, for example, rose almost 19% in November, the highest monthly gain in its 40-year history. The optimism of Joe Biden’s election win plus positive news from Pfizer, Moderna and Astra Zeneca regarding excellent efficacy of Covid-19 vaccinations were the key reasons why markets rallied so strongly.
Additionally, the equity market was further encouraged by the appointment of Janet Yellen as the US Treasury Secretary.
From equity investors perspective, the future couldn’t look brighter. For them, soon the virus will be defeated, and the incoming US Administration will dial down trade tensions, maintain or even increase monetary and fiscal stimulus, and recommit to US-led globalisation after a 4-year hiatus. Thus, Gold was sold off due to its safe-haven nature as portfolios raised cash from the yellow metal to buy equities. But as Marketwatch below state, there should be some caution:
But the Gold move has obviously disappointed investors, especially when expansionary and stimulative measures are expected. What has also been strange is the breakdown in the correlation between the US Dollar and Gold. Usually, this inverse correlation (when the US Dollar weakens against other major currencies, Gold is thought to rally) is fairly reliable but both Gold and the US Dollar have been going down. This suggests profit-taking as described above. Indeed, Bloomberg data shows much of the selling has come from ETFs. There have also been suggestions that some Gold holdings are being sold to buy Bitcoin though this hasn’t been substantiated with sufficient data so far. What is clear is that the selling of Gold was significant(chart from BAML):
So what next?
Despite the super positive news for markets of late, Gold remains fairly close to its all time high posted earlier this year. And while the move down looks bad Gold is still up close to 20% this year. There could be continued underperformance if stock markets continue to rally into year-end as investors close their books for the year.
Looking to 2021 however, the key reasons to hold and buy Gold remain. Stimulus and easing from almost every government will increase and interest rates look to remain low or negative, even if the hoped-for economic recovery creates inflation. Central Bankers have said repeatedly that they would let inflation over-shoot targets before even considering raising interest rates. All the key facets for Gold recovery remain regardless of how the economy does. If the economy remains sluggish then there more stimulus. If instead it roars back to life then inflation fears could really accelerate.
What is unlikely to change is the post-2008 global financial crisis policy orthodoxy. Policymakers are convinced the only way to go is for more debt and stimulus. In addition, ideas like MMT (modern monetary theory) and UBI (universal basic income) have firmly moved from the fringes to the mainstream. It is only a matter of time, many believe, that they become additional tools for governments. Furthermore, there is even talk of cancelling sovereign debt. Such goals would have been met with a huge outcry a decade ago but now they are even considered and debated:
The chart below from Morgan Stanley and ZeroHedge shows how much money has been created to save the economy:
If this continues inflation will spill over from assets into basic goods. Copper is already moving higher as is oil. House prices remain stubbornly high despite a massive recession. Inflation is in the stock market. Valuations are high historically and many companies with low revenues are worth billions. Tesla for example is now worth almost as much as the rest of auto industry combined.
And in China the debt just keeps on growing:
As long as these policy trajectories continue then savvy investor will continue to invest in Gold and take advantage of pull backs, like the one now, to add to their position.