Market Overview

18 August 2020

Precious Metals Make a Dash against All Competitors

Gold spot prices quickly soared again above $2,000 per troy ounce, even though they started the week around $1,940. Silver futures are trading above $28 per ounce, clearly keeping in mind at least the $30 area retest as a first reasonable technical target. Even platinum, which is more dependent on industrial demand, is breaking through its four-day resistance around $965 per ounce, looking in the direction of the psychological landmark of $1000. 

Last week's mini-crash on the precious metals market seems to be totally forgotten, as many investors only took advantage of temporarily low prices to replenish their portfolios, which was almost equivalent to finding a buried treasure. A hypothetical pirate's hoard of gold coins would have gone up by eight %, if to count from the bottom of the previous week. Just a couple of days ago the famous American investor Warren Buffett, the creator of Berkshire Hathaway, announced that he is buying shares in gold mining companies, and this after so many upward moves in gold prices already. 

The Aussie is approaching a new high for this year in sync with the gold movement, as Australia is the world's second largest gold-producing country after China, providing almost ten % of the world's production of the yellow metal. The rise of the Australian Dollar was helped a lot today by comments from the Reserve Bank of Australia (RBA), which indicated in the minutes of its August policy meeting that the pace of domestic economic decline was not as strong as they suggested before. The Australian financial regulator rules out the need for further policy easing for now. Its package of measures was working "broadly as expected" with an economic recovery underway in most of the country. 

"Members noted that the downturn had not been as severe as earlier expected and a recovery was under way in most of Australia. The recovery was, however, likely to be slower than earlier expected, with the COVID-19 outbreak in Victoria having a major impact on the economy," the RBA stated. RBA Governor Philip Lowe recently emphasised the necessity for greater fiscal spending to revive the country's economy saying there were now limits to what monetary policy could do. Around 30% of Australia's working-age population are on government's COVID-related welfare payments: the reason for these benefits was sad, but the recovery effect is definitely positive. 

The RBA also maintains its target for the three-year government bond yields creating an attractive yield curve, which gives some advantage to the Australian debt assets in their competition with the similar U.S. Treasury bonds. Taken together, all these factors lead to the continuation of a partial capital outflow from the United States to Australia, which reduces the value of the Greenback even more. A similar mechanism works for the currency pairs of the U.S. Dollar with the Euro, Chinese Yuan and other reserve currencies. The result expresses itself in EUR/USD above 1.19 today at European noon, USD/CNY below 6.92 and USD/CAD below 1.32, i.e. near its levels of January. A cheaper Dollar, in turn, spurs up the fast climb in gold and other precious metal prices, and so the circle closes, or rather turns into a spiral. 

The balance sheet of the U.S. Federal Reserve system (Fed) goes off-scale keeping the high bar of around seven trillion Dollars, and the changes of the figure are minor, but the financial market expects a continuation of the trend for its growth as the economy requires additional incentives soon. So, the Fed's asset purchasing programs are likely to be continued step by step, and that is a major factor for the further depreciation of the main reserve currency of the world and for gold prices to go higher in the course of time. 

A geopolitical standoff around Cyprus between Turkey and Greece, which threatens to turn into an open military conflict with the participation of France or Egypt, is also on the table. Ankara announced its plans to keep exploring the coast of Cyprus. EU members repeatedly called on Turkish authorities to abandon this strategy, as it violates the exclusive economic zone of Cyprus. Greece warned of a possible conflict, as France representatives said they would strengthen its military presence in the eastern Mediterranean area. 

Among the factors that are raising prices for precious metals these days, it would be fair to mention, is the strange and rather indefinite cut of cards in the U.S.-Sino trade relations. The postponed six-month review of the "phase one" deal may be complimented by several new parts of the puzzle. U.S. President Donald Trump on Monday promised to create ten million jobs in ten months, in part by setting up tax credits for U.S. companies that relocate their manufacturing facilities to the United States territory from China. His administration would also strip federal contracts from companies that outsourced work to China. “We will end our reliance on China, we will make our critical drugs and supplies right here in the United States,” he said in Minnesota to his supporters. His government just made a list of further restrictions on China's Huawei Technologies, cracking down on its access to commercially available chips. The Defence Department of the United States has determined before that 20 top Chinese firms, including Huawei, are either owned by or backed by the Chinese military, so in the future, they would not agree to share military secrets with countries where Huawei technologies are available. 

Mr Trump said he supports restrictions on Huawei because "they spy on the U.S.". On the other hand, he clearly mentioned yesterday that China is "more than living up" to the "phase one" agreement, as it recently made "large" agricultural purchases from the U.S. adding that he is still upset with China over COVID-19. White House trade advisor Peter Navarro, who is supposedly close to Trump, also commented on CNBC this Monday that "China trade deal is on track", and China is "absolutely" keeping their word based on "epic" purchase of agricultural purchases. To top it off, the U.S. Commerce Secretary Wilbur Ross remarked that U.S.-China talks "continue at various levels" but added that the White House is looking to "close loopholes" to prevent Huawei from getting access to U.S. technologies. Against the backdrop of all these verbal exercises gold is growing much faster these days than global stock indexes. 

"The bout of profit-taking in gold is short-lived," that's also a view of analysts at UBS bank, as they expect a stronger bounce towards $2,300 per troy ounce. "Gold’s run... hasn’t quite finished yet," says Manpreet Gill, a strategist at Standard Chartered. "The gold rally still has some ways to go despite its recent stumble... It comes back to interest rates... a recent pullback in gold prices was explained by an uptick in bond yield... One of the best explanations of why gold has surged the way it has through this year have been bond yields... As long as yields stay below one %, that doesn’t really alter our longer-theme that ... central banks have really liked to do whatever they can to keep bond yields capped. Net of inflation or what we call real bond yields, those have been sort of on a one-way tear and that’s sort of lined up very nicely with [a current] move in gold. We have quite a bit of one-sided positioning in gold and I think, you know, that’s actually unwound quite quickly. A lot of our proprietary indicators are telling us exactly that... it’s ultimately a great environment [for gold],” he described his point of view on CNBC.



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

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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