Gold continued its consolidation pattern once again. There is a definitely a wait and see attitude of the major gold investors. Waiting for what? First of all is the size and scope of the stimulus package currently being debated by the US Congress. Second, all markets are watching the alarming increase in COVID-19 cases around the world. This is especially the case in Europe where mini-lockdowns or circuit breakers are starting to be initiated and debated. Finally, the not so small matter of the US Presidential election in just under two weeks remains a potential inflection point for how risk will be priced in the future.
More draconian lockdowns will lead to more stimulus measures globally, that is clear. And Congress should eventually pass the next stimulus bill. As for the election, the main fear is Trump refusing to concede and the result going to the courts. Such uncertainty would lead to a definite “risk-off” environment. Almost, nobody believes Trump will win. But then again, they thought that last time.
From a market perspective the weakness in the US Dollar has also been a tailwind for gold this year. This is because gold is considered to have a negative correlation with gold. Why? Gold is priced in US Dollars. And because as the US Dollar depreciates, gold becomes cheaper in other currencies, leading to additional demand. Additionally, because many financial assets are held in US Dollars, when the US Dollar declines, investors tend to buy gold as an alternative safe haven.
So why has the US Dollar been so weak recently? Many Wall Street analysts believe the policy of the Federal Reserve will keep the US Dollar low and that the growth prospects outside of the United States are stronger than within the United States. This article from September summaries the main arguments:
As the chart below shows, the “Dixie” or DXY (a basket of major currencies plotted against the USD) has declined considerably from its March high. And, like gold it has traded within a tight range since the summer. All bets are off until after the election.
But what about the other side of the trade. China has been in the spotlight for many reasons this year. But really without anyone noticing the Chinese Yuan made a new recent high against the US Dollar. China’s perceived ability to control the Corona Virus, and relative economic strength, as well as hopes a Biden presidency will take a softer approach have all contributed:
The news for the US Dollar didn’t get any better either as PayPal gave Bitcoin some much needed credibility. Paypal will now let users transact in Bitcoin, Ethereum and other more ubiquitous cryptos:
Even though payments company Square made a similar move a few years ago, this feels a bit more significant. Enabling alternative crypto currencies to the USD within the United States is a significant step and fits neatly into the broader narrative of US Dollar decline. Once gold is enabled in a similar fashion then the flight from the US Dollar could really move.
However, such currency replacement regimes can take time, and in the sovereign space there is still little to challenge King Dollar. The Dollar’s obituary has been written many times and the current bearishness could come back to haunt the shorts if Biden wins big.
At the same time however, there are moves to slowly create acceptability of other forms of digital currency. The digital Euro is one such example.
The ECB challenge to cryptocurrencies is clean and plain to see:
This process will take time but be in no doubt, governments and central banks are fighting back against those they deem as challengers to the system. Perhaps that is why, after such a catastrophic year for governmental competence, global policy makers are calling for renewed action for intervention and coordination in the global system.
Why does this all matter for gold? It is clear that policy makers will always adhere to the maxim “never let a good crisis go to waste”. New sovereign backed digital currencies, new global schemes and policies and being proposed not because the world system is strong, but because it is very weak and very fragile. And the only way these policy makers imagine solutions is to become more interventionist. In human history these stories have happened before, and certainly they will happen again. But with a system in such a bad state it does feel very likely that all sovereign currencies, being indeed fiat currencies, will continue to depreciate in the long-term no matter what policies the IMF, the ECB or the World Bank try to enact. As the IMF so nonchalantly commented:
“We have seen global fiscal actions of $12 trillion. Major central banks have expanded balance sheets by $7.5 trillion. These synchronized measures have prevented the destructive macro-financial feedback we saw in previous crises.”
One could ask where all this money comes from? But few do anymore. When policies like these are the norm, then gold’s path should remain higher.
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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.