Gold Breaches the $1,900 level

Gold Breaches the $1,900 level

Friday, 28 May 2021

Both gold and silver continued to trend higher this week, with gold briefly breaking north of the $1,900 USD level, and silver rising just above $28.00 USD. We had a move lower in US treasury yields and a weaker USD to give support to both metals. Additionally, the ongoing development of a new wave of covid cases across Asia contributed to some safe haven buying the past few weeks. The AUD/USD remains flat at 77.5 which means we are seeing a steady trend developing for the metals in AUD terms.

In this week’s update we take a look at the concerning developments across South-East Asia, and what it could mean for financial markets from a long-term perspective.

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Gold ETF inflows have accelerated again this week as the price is currently eyeing the psychological $1,900 level in USD terms.  The inflation outlook continues to gain traction in the US with stronger than expected PMI data last week. We talked about Chinese gold demand over the past few weeks as Asia had been soaking up as much as possible at the recent lower prices. April saw Chinese gold imports surge to 111.9 tonnes, an almost three-fold increase on March’s 38.58 tonnes.

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India is currently grappling with the covid crisis and would be experiencing weaker demand as a result; however, we would expect western investors to start chasing momentum in gold ETFs to offset an anticipated drop in Asian physical demand, perhaps moving into the next few months. The world’s largest gold ETF, SPDR Gold Trust (GLD) rose by 0.6% and speculators raised their net long positions in comex gold last week, so it is interesting to see demand for ETFs increasing with the higher price, compared to when they were net-sellers at the recent March 2021 lows. The higher gold can manage to climb the better ETF inflows will be, as that demographic of investors love to chase momentum.

In the very short term, we could expect some resistance at this $1,900 level and we also mentioned last week the decent possibility of gold retracing back to test the recent breakout, which sits at around the $1,860 level. If gold clears $1,900 convincingly and closes above that level by the end of the week, that would make for a great weekly close, but it would be quite a challenge.

Silver continues to look great on a technical basis as we consolidate sideways in what seems to be an ‘re-accumulation phase’, and not a distribution phase. After such a large run from $12.00 USD to $29.00 USD, one would usually think a significant pullback would have to be on the cards. However, it has been months now since the August highs and silver continues to see very strong demand at current levels. It has even managed to put in a significant ‘higher low’ at 24.00 just recently. Silver remains bullish on a technical basis.

A move up through 28.50 USD would very likely get things going and we could be shaping up for a move through 30.00 in the next few months (if the gold trend continues on track) which would no-doubt excite some fresh longs into the market if we can break that level. As long as gold can maintain the current momentum, silver looks to be gearing up for a big move if the 30.00 USD level is breached, so watch this level closely in coming months, it could be dramatic.

Silver daily chart. Re-accumulation phase

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Silver weekly chart

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Covid – the new wave through Asia

It is not just India being devastated by a recent wave of Covid cases, but much of Asia has seen a recent surge as new variants are creating havoc across Mongolia, Taiwan, Vietnam, Thailand, Singapore and even China. Areas which previously seemed to have the situation under control are now seeing a resurgence. Thailand’s cumulative caseload has more than quadrupled since April 1st to almost 130,000, with a rapid transmission in a prison leading to a record 9,000 new cases on Monday. Taiwan, which last year had a stretch of more than eight months without any locally transmitted cases, set a single-day record with 333 cases on Monday. The concern here from a global perspective, is that the new variants of Covid could potentially remain an issue that we have to live with collectively for years to come. If vaccine rollouts fail to gather pace globally in time to contain the virus, and prevent further mutations, the covid-19 problem could remain in place for a decade or more. We just don’t know at this stage how many variants or mutations we will see before we reach a level of vaccination which bring the virus under control globally. Investors would be weighing up the possibility of a worst-case scenario which could involve an ever-changing virus which requires ever-changing vaccines, similar to influenza. A Harvard team suggests ‘if the virus induces short-term immunity — similar to two other human coronaviruses, OC43 and HKU1, for which immunity lasts about 40 weeks — then people can become reinfected and there could be annual outbreaks.’ If the coronavirus problem is indeed here for the long haul, it could well change the economic landscape significantly.

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How the pandemic progresses is vitally important to financial markets, as the end result will likely have a big impact on the sorts of government and central bank policies put in place in years to come. The current trend is one of overspending governments going further into debt, and central bank balance sheets swelling larger with each passing year. The ‘monetization’ of economies could be the best way to describe what is happening, as central banks believe they can solve most issues by continually expanding the money supply in order to buy government debt and other assets, and by creating an environment that fuels credit expansion via lower interest rates. Let’s say the pandemic remains for 10 years to come. What would central bank balance sheets rise to as a percentage of GDP? And what new policies could we see?

The types of policies talked about today including ‘universal basic income’, ‘deeply negative interest rates’, or ‘modern monetary theory’ are very real possibilities in a future where the coronavirus pandemic remains a constant and changing problem. What we could also see is a dramatic shift in the net-wealth of different populations, depending on how their government handles the response to the crisis. We could see inequality rise dramatically between different countries, as those without the resources fall further behind into economic crisis, whereas those able to afford (potentially) the roll-out of new vaccines every few years will have a major advantage. The world in 10 years’ time could go through one of the most significant and rapid shifts in recent times if we are not able to tackle the problem within the next 12 to 24 months.

It is concerning to think of the level of experimental monetary policy that could take place if indeed we are faced with a decade long pandemic. The worse the covid problem the more accommodative central banks and governments will need to be, and the higher the risks they will be willing to take as we move into uncharted monetary territory.

The decision that will face governments and central banks will likely be one of choosing maximum employment and growth at the expense of currency debasement and inflation. If you do not have a portfolio that is truly balanced and prepared for all scenarios in the next few years, you would be doing yourself a disservice. Gold seems more important now than ever before, as central banks will struggle to keep the system going in its current form and will have a massive challenge of maintaining the broader populations confidence in them actually being in control. Direct from the ECB themselves, we will finish with a summary of their latest Financial Stability Review in which they state that ‘vulnerabilities remain elevated’.

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Until next week,

John Feeney

Guardian Gold Sydney

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