Market Overview

22 July 2020

Gold and Silver Are Gaining Traction on Greenback Weakness

While European and global stock markets are making a pullback after a spectacular jump at the beginning of the week, the U.S. Dollar is crawling just a little higher against the basket of major reserve currencies keeping its weakening overall trend intact. In particular, after a brief decline to the area of 1.1505 before noon, the single European currency soared again above 1.1540 vs its American competitor, as the Euro-nominated assets are getting support by the New Generation EU stimulus package adopted by the Old World leaders.

The Australian public debt also attracts foreign investors prowling the globe for higher yields as the Aussie bonds provide at least a few additional basis points if compared with the U.S. Treasuries. Japanese funds alone spent $6.6 billion to buy more Aussie bonds in May, the highest monthly total volume since 2005. Last week Australia sold as much as 17 billion of their new debt denominated in local currency, which is equivalent to nearly $12 billion. Some 45% of the total sale earlier this month went to foreign investors, mostly from the U.K. and other Asian countries, excluding Japan. The Australian Office of Financial Management has scheduled an offer of bonds maturing in 2051 for next week, and analysts expect the government to sell somewhere between four billion and eight billion in Australian Dollars. The restrained activity of the Reserve Bank of Australia, which has halted purchases for the past two months, dampens bond prices and boosts bond yields as most other central banks continue their bond purchases in an unlimited manner.

Beyond just yield, Aussie bonds create the steepest yield curves among all developed countries, because the Reserve Bank of Australia maintains its yield-curve control on the three-year bond, intervening when necessary to maintain the yield at 0.25%. This policy produces at least 60 basis points (bps) spread with the 10-year bonds vs a 50 bps in U.S. bonds and below a 20 bps spread in the similar Japanese assets. A usual carry trade investing strategy for just borrowing at a low interest to buy the higher-yielding and long-term papers might be well performed in the case of Aussies. There is also the so-called roll benefit in capital appreciation as the paper "slides" down the yield curve. In addition to the political, financial and economic stability, Australia offers relative success in containing COVID-19, despite closing the borders to the most populated state of Victoria and renewed partial lockdowns in Melbourne earlier this month.

The conservative trope for the Aussie assets helps the AUD/USD climb higher and higher. The pair jumped over the 0.70 old ravine yesterday, but today AUD/USD quotes have already reached the alpine meadows near 0.7170. There is no obvious upper limit to this ascent so far. Since Australia is one of the world's largest exporters of gold, the strength of the local currency is positively affected by the increasing prices of the yellow metal. Gold continues to conquer one peak after another. After touching the mark of $1,865 per troy ounce this morning it is coming one step closer to the absolute peak of the price reached in 2011 and to the psychological mark of $2000/toz, which attracts a lot of eyes.

“Gold has resumed its core bull trend and with resistance at $1796/1803 conclusively cleared and with a fresh albeit small bullish continuation pattern in place we stay bullish for a test of the $1921 record high. Support at $1790 now ideally holds to keep the immediate risk higher," strategists at Credit Suisse just wrote today. This corresponds closely with another Credit Suisse forecast published in May that in the "bigger picture, we continue to look for an eventual move to new record highs, with resistance then seen next at $2000, then $2075/80".

Gold prices reacted both to the considerable dilution of major currencies spurred by central bank constant emission in the frame of various versions of countless quantitative easing (QE), and to the fresh rise of stock indexes at the beginning of the week. Since gold assets are an inherent protective component of many stock portfolios, many investors used to put more gold assets into their portfolio together with fresh stock purchases.

The current strong movements in gold, in turn, spur an increased demand for other precious metals. The platinum futures have already risen to a new high since March, as silver topped $22 per ounce, where it was last seen in 2014. Some traders expect silver to keep up with its industrial demand as silver’s biggest new use is in the manufacture of conductors for 5G cellular technology, beyond the usual making of jewellery, cutlery and coins. “Industrial demand for silver is still a bit of a question, so I think that might be one of the main reasons that silver is dragging a bit,” Christopher Lewis, an independent precious metals analyst said in the beginning of July, but now the movement is seen to be flourishing.

Silver may even continue to outperform gold but global recovery is more critical for its industrial use. Much of the increase in the value of industrial metals and other assets is happening partly in advance. However, the depreciation of the equivalent real filling of both the Euro and especially the U.S. Dollar, thanks to the European Central Bank and the Federal Reserve printing presses, strengthens the ground for probable future growth in price of both commodities and precious metals, and even some stocks, since their physical value has not dimmed, but the units of measure lost too much of their previous weight.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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