Market Overview

5 August 2020

Gold and Other Competitors of the U.S. Dollar are Well Regarded

The major European stocks started higher today and are continuing to hold the gains, thanks to the successful recovery of initial losses by the end of all trading sessions on Tuesday, and also because of the fresh summer record for the U.S. broad market S&P500 index futures above 3325, where it stood on midday Wednesday. Some positive earning reports in Europe fuelled the movement as even the travel and leisure sectors, which are considered to be the most exposed to the corona-related restrictions, led the morning surge. Mining, industrial companies plus oil and gas sectors were pushed higher by oil prices that jumped above $45/bbl for Brent crude benchmark. 

A German real estate company, Vonovia, rose 3.2% after it presented an eight % rise in profits for the first half of 2020 and confirmed its forward guidance for the rest of the year. Ahold Delhaize, which is a large operator of supermarket chains both in the U.S. and Europe, hit a record high as it raised its 2020 sales outlook after the lockdown was lifted with extended traffic through its stores and online delivery services. Meanwhile, the shares of the Bank of Ireland soared 10.5% after its CEOs shared the view that they are beginning to see some confirmations of the general recovery, pointing with great confidence to a better income outlook for 2020 final results. 

Slightly worse than expected, but still very bright indicators of business activity came from the European service sector PMI, which was presented at 54.7 points against 55.1 points of average expectations in the Bloomberg polls. Many supposed that the data is still very positive if compared to 48.3 points only just a month before. The U.S. service sector data, which is going to be released later in the evening today, may add to the bullish risk appetite, and at the same time may further weaken the Dollar, which has completely failed to perform in front of the enthusiastic audience of competing currencies. 

The highly stimulated Euro, the brave Aussie and Qiwi, and the oil-jump all supported the Loonie and even the seemingly Brexit-weary British Pound is gaining momentum against the Greenback which is being diluted by the money printing press. The U.S. Treasury has already placed its bonds, which were not backed by any new production volumes or services output, at a record of $2.753 trillion in Q2 2020, and Steve Mnuchin's office is about to shake up the markets again with an avalanche of more than two trillion Dollars in new debt. For the period from July until September, the volume of fresh U.S. loans on the market is expected to reach $947 billion, and it would cost another S1.216 trillion until December, according to the plan published on the official U.S. Treasury's website. 

All of this distorts the usual crisis essence of the U.S. Dollar as the world's main reserve currency. Most investors do not feel a strong fear of the potential second wave of the virus and new lockdowns, as they rely on potential vaccines that are going to come soon. This sentiment makes it irrelevant to invest large amounts of  money into the safe-haven U.S. Dollar cash just for the sake of a purchase of U.S. Treasury's bonds with extremely high ratings, but negligible coupon yields. Any good data from the U.S. only exacerbates the tendency to abandon excessive savings in the U.S. currency, which is in fact more of a global value than a national one. 

Both as a safe-haven asset and as an asset that complements a lot of risky investment portfolios in the markets, the preference is given to the gold spot contracts and other gold-related market instruments. As a result, gold prices jumped today to a new all-time record above $2,040 per troy ounce, easily leapfrogging the $2020/toz "holy" bar, which was symbolically awaited by many traders as a big banana skin of the year. 

Barani Krishnan at Investing.com remarked only yesterday that "gold rally shifts to lower gear with a new feature: higher lows". But, today's market also created some higher highs too. Christopher Lewis, an independent gold chartist, who blogs on FX Empire, said the yellow metal was poised to go beyond $2,000, and it may take some investors time to get used to the idea, but “if we get a daily close above the $2,000 level then it is probably a signal that we are ready to continue.” And then he added: “All things being equal, there is absolutely nothing on this chart that remotely suggests that you have any business trying to short gold”. 

"Forays above $2000 are expected to remain short-lived," the strategists of Commerzbank remarked, as gold prices already reached Commerzbank’s target of $1983 in the beginning of the week, where they saw the top of a 49-year technical channel. "Above $2000 we have a point and figure target of $2030 and a Fibonacci extension to $2088," they wrote yesterday while also defending the view that the yellow metal "may experience some profit taking, as the 55-day moving average at $1838 provides a solid support". 

But the experts at UOB Group predicted that gold prices will advance to $2,200/oz before Q1 2021. So, they emphasised: “Gold has broken above the previous peak of $1,920 in Sep 2011. In terms of technical outlook, we note that the upward momentum is strong and... the next resistance of note above $2,000 is around USD $2,040 followed by $2,100... Fundamentally, the various positive drivers for gold price, particularly that of the massive central bank easing remain as strong as ever. However, we note that long positioning in gold has become extremely crowded with ETF tonnage rising to yet a new record high. As such, there is now an increasingly speculative element in gold’s price action with larger intraday swings." 

But, it is worth noting that gold prices rose by almost $900/toz from the 2008 peaks before reaching the saturation point in 2011. During the current crisis, it has added only about $450/toz for now compared to the pre-viral peaks of the beginning of 2020. So, the charts still have enough free space above if the market sentiment needs it. The U.S. Dollar as a unit of measure looks so frustrated now that not only silver futures and many other metal contracts are growing in price, but also a variety of commodities are doing the same. Even the coffee bean contracts gave a brilliant example, adding more than 23% in just three weeks to the price levels of mid-July, which is extremely high in the present conditions, when monetary incomes and consumption are clearly not ready to be higher.

 

Disclaimer:

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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