Gold stalls at $2,500
Wednesday, 25 August 2021
Gold stalls at $2,500
It been a perfect storm for the gold price in AUD the past few weeks, as gold managed to climb back to USD$1,800 whilst the AUD was under pressure from a collapsing iron ore spot price and announcements of extended lockdowns across Sydney and Melbourne. But is gold shaping up for a pullback?
We’ll take a look this week at the price action in metals and the AUD/USD.
Firstly, to gold in USD terms; we are looking neutral if anything, neither overbought or oversold, as the price is slowly recovering and still battling for the $1,800 level. This week we have US GDP and Jobless claims numbers coming out on Thursday night so we may see some movement in the USD and gold depending on the numbers. We then have the Jackson Hole symposium later in the week where Central bankers will meet virtually for their annual gathering which typically takes place in Jackson Hole Wyoming. It is usually seen as a somewhat important meet as we get some commentary around monetary policy moving forward which could impact the USD and precious metals prices. This week it will likely focus on the ‘how and when’ the Federal Reserve will start to wind back its bond-buying program and we will likely have some commentary around inflation.
Until then the US dollar gold and silver price may be quite stable; however, the AUD price is what we’re watching closely.
Gold in USD
After such a run for the AUD gold price it makes sense for it to take a breather. Many clients watching closely and hoping for a pullback may be rewarded this week or next. The Aussie dollar gold price has found some resistance around the $2,500 level, after looking a little overbought in the short-term. Gold in AUD is currently pulling back and hitting the $2,480 at time of writing.
Gold in AUD
The main potential catalyst for a pullback in precious metals within the next week would be the appreciating AUD. The Aussie dollar has been sold off aggressively as we had combined announcements of various states heading into extended lock downs whilst China was creating havoc for the iron ore price. Iron ore spot prices have been slaughtered of late, down circa 40% since the recent highs, impacting the AUD negatively. We wouldn’t be surprised that iron ore bounces back a bit in the short-term after such a capitulation, which may help the AUD/USD recover, and see lower PM prices for domestic investors in the very short-term.
It’ll be worth paying attention to the price in the coming days as buying on short-term AUD strength can always help with finding a lower entry. The Covid cases in NSW hit a new high today of 919 cases, so there is still a great deal of uncertainty around when we will be able to open the economy up to some level of normality. AUD bears have also been concerned with Australia’s lockdowns and the implications on our probability of recession and the monetary policy response that could come from the RBA.
From a longer-term perspective, it is difficult to imagine that the Australian economy will bounce back to its feet straight after the lockdown period is over. Many businesses won’t be opening their doors ever again and many employees will no longer have a job to walk back into. The participation rate in Australia has been dropping which makes our unemployment rate look a little better than reality to say the least.
Although the RBA has been consistent with their message that they will not take interest rates negative, I think this should be taken with a grain of salt. Only a few years ago the RBA was consistent in their stance that they would not be doing any form of quantitative easing, and look what happened there. Negative interest rates at the RBA level are becoming a more likely possibility and APRA has been on the front foot to make sure banks are well equipped for this to happen. The below APRA letter went out to banks in July to make sure all ADI’s are prepared for negative interest rates.
We can imagine a few things that could come as a result if we indeed see this happen. One would be the property market could get even more unattainable for young investors or families trying to buy their first home as prices could make another leg higher. The other would be that savings accounts potentially cost you money each year, rather than offering a return (if rates go deeply negative). The current interest rates on savings accounts already cost you money if you factor in inflation, so imagine what gold demand would be like in a negative interest rate environment here domestically. Gold demand in the past 12 months has already been incredibly robust, but the lower rates drop into negative, the greater the appetite of the gold and silver investor.
Until next week,
Guardian Gold Sydney
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