Gold Amid Epidemiological and Economical Update

Sometimes when we observe people on the streets, when we see crowded restaurants and pubs, it seems like the pandemic has ended. But is the global epidemic really over? Not at all. Please look at the chart below. As one can see, the daily number of confirmed cases of COVID-19 in the world is still in an upward trend.

However, in the developed countries the number of daily new cases has declined and stabilized at very low levels, as one can see in the chart below. So, although the pandemic is not over, it has been contained in the West. And remember that global capital markets focus on developments in major economies and financial centers, which are precisely rich countries.

The only possible exception is the U.S., where the number of new cases has also peaked, but it stabilized at not so low level, as the chart below shows. Actually, the number of new cases is at level from the turn of March and April – and it has been even rising recently.

However, people’s reaction is different. So, although the pandemic is not over, the fear is over. At the beginning of the epidemic, people panicked (rightly or not), but after two months in quarantine, they got used to the new epidemiological situation. After all, the virus has not mutated (so far), the healthcare systems have not collapsed (luckily and partially thanks to the adopted containment measures), the mortality rates have not surged, and the world has not ended. People quickly adapted to new circumstances and they learnt how to live with the coronavirus threat.

This is very important as markets are driven not by facts and the number of daily new cases of Covid-19, but by people’s emotions and reactions to these facts and to the epidemiological threat. And now it seems that many people stopped to fret about the coronavirus.

Rightly or not. We mean here that there are some important arguments for not worrying and be optimistic about the epidemic. The worst is probably behind us and we are now better prepared to handle the pandemic (the shortages of equipment have been remedied). Moreover, in June, the scientists at Oxford University in the United Kingdom reported that the dexamethasone could be the first drug able to save the lives of Covid-19 patients (however, the study results were presented only in press release without any scientific paper).

On the other hand, the threat of the resurgence of the coronavirus is real. Many American states noted a record number of new cases (or new hospitalizations) of coronavirus in June, and Florida could be the next epicenter of the pandemic.

Meanwhile, on the other side of the Pacific, China faces the new coronavirus outbreak in Beijing. In consequence, several communities in the Chinese capital are back on lockdown. The surge in new cases in Beijing, and in other Asian cities (like Tokyo) or American states, is a clear warning to the U.S. and other Western countries: the second wave is possible.

This is, of course, positive for the gold market, as the risk of resurgence of the coronavirus and the reintroduction of the economic lockdowns supports the safe-haven demand for gold and its prices. However, investors should remember that the number of new cases within the second waves are so far limited. The autumn wave could be worse, but the situation is not out of control yet (and wearing masks can help reduce the size of a possible second wave of infection). And the key issue is that even the second wave will not trigger rally in the gold market, unless it spurs fear in the marketplace and it diminishes confidence in the US economy.

So far, the market is not worried about a large outbreak in the fall. It seems that investors believe that there will by the fall enough testing, contact tracing, drugs and R&D on vaccines. And that we will not shut down economies as deeply as we did in spring, if there is the second major outbreak in fall. This time the market might be right – however, at the beginning of the year, Mr. Market was clearly too optimistic, so correction in the risky asset markets is possible at some point this year.

Luckily, the bullish perspective for gold does not depend solely on the second wave. After all, the price of gold has not collapsed amid the optimism about the end of epidemic and economic revival. The key is what the Fed has recently said: it would take nearly two years to fully recover from the coronavirus recession. The subdued economic growth, the dovish U.S. central bank and ultra low real interest rates should support the gold prices (unless they surge suddenly).

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD

Sunshine Profits: Analysis. Care. Profits.

People Worry Again. Will They Buy Gold?

The U.S. is still knee-deep in the first wave of Covid-19. So, gold should be still knee-deep in the bullish wave.

“Really not good.” This is how Anthony Fauci, the U.S. leading infectious disease expert and the member of the White House Coronavirus Task Force, described the current state of the epidemic in America.

Fauci is right. Please take a look at the chart below. As one can see, the number of new daily confirmed cases of Covid-19 has surged recently, surpassing the April peak and jumping above 50,000. Since the beginning of the pandemic, almost 3 million Americans have become infected with the coronavirus and more than 130,000 people already died in the U.S. because of it.

The surge in U.S. coronavirus cases has made people worry again. Raphael Bostic, Atlanta Fed President, said on Tuesday:

We are hearing it more and more as we get more data. People are getting nervous again. Business leaders are getting worried. Consumers are getting worried. And there is a real sense this might go on longer than we have planned for.

Indeed, more and more states and countries are rolling back the economic re-openings or even re-imposing lockdowns. For example, Melbourne, Australia’s second biggest city, ordered its residents to stay in their homes for six weeks amid the resurgence of infections. In the U.S., New York expanded its travel quarantine for visitors from three more states, while Florida’s greater Miami area rolled back its reopening.

However, the White House pushes the country to fully reopen, as President Trump said on Tuesday that the U.S. is “not closing, we’ll never close”. Given the resurgence in new cases, such calls are controversial. The full lockdown is, of course, absurd, and the incidence of deaths from Covid-19 are declining, but this is because the new infections occur mainly among young people. But if the coronavirus spreads wider, the daily number of deaths may rise again.

Implications for Gold

What does it all mean for the gold market? Well, data shows that current pandemic will remain active for longer than many people anticipated. As Fauci noted, America is “still knee-deep in the first wave and unlike Europe, U.S. communities never came down to baseline and now are surging back up.” This is great news for gold prices. The longer the outbreak of Covid-19 lasts, the longer the safe-haven demand for gold will remain elevated. Moreover, until the health crisis is fully resolved, the economic activity will be subdued, while both the Fed and the Treasury will stick to the ultra-easy monetary and fiscal policies. After all, a resurgence in coronavirus cases makes Americans more cautious, hampering consumer spending and GDP growth. It will also make the disconnect between the real economy and financial markets even larger. Importantly, some of the government stimulus programs will expire at the end of July, so either the U.S. economic growth will slow down or we will see more fiscal and monetary measures. Given the upcoming presidential elections, the new round of support is likely, which should raise worries about the level of the U.S. fiscal deficit, federal debt and inflation, supporting the gold prices.

Not surprisingly, gold has been gaining recently. As the chart below shows, the price of the yellow metal has jumped above $1,800 yesterday (the chart paints future prices, but spot prices also surpassed this important psychological level).

Of course, it remains to be seen whether the price of gold will stay above $1,800 for long. But even if it retraces some gains in the near future, the further march upward is a matter of time in the current macroeconomic environment.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

 

Arkadiusz Sieron, PhD

Sunshine Profits: Analysis. Care. Profits.

Will Gold March Forward on Fed’s Forward Guidance?

The Fed could strengthen its forward guidance later this year. Given its dovish bias and the fresh viral outbreaks, it could be positive for gold prices.

Last week, the FOMC has published minutes of its meeting from June 9-10. They show a few interesting things. First of all, although the Fed officials could be satisfied with their monetary policy stance, they want to communicate better to the markets their intentions about the path of the federal funds rate and the Fed’s balance sheet. In other words, the FOMC is likely to strengthen their forward guidance later this year:

Participants agreed that the current stance of monetary policy remained appropriate, but many noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions as the economic outlook becomes clearer. In particular, most participants commented that the Committee should communicate a more explicit form of forward guidance for the path of the federal funds rate and provide more clarity regarding purchases of Treasury securities and agency MBS as more information about the trajectory of the economy becomes available.

Now, the question is the type of the forward guidance which will be chosen. A few members of the Committee suggested the use of the calendar-based guidance, which sets a specific date beyond which accommodation will be reduced. But participants generally preferred outcome-based guidance. While a “couple” of them wanted to tie any rate hike to the decrease in the unemployment rate below a certain level, a “number’ of central bankers preferred to make the normalization of the federal funds rate dependent on the inflation rate. Actually, they suggested that the Fed should not hike interest rates unless inflation would modestly overshoot the 2-percent target:

A number of participants spoke favorably of forward guidance tied to inflation outcomes that could possibly entail a modest temporary overshooting of the Committee’s longer-run inflation goal but where inflation fluctuations would be centered on 2 percent over time. They saw this form of forward guidance as helping reinforce the credibility of the Committee’s symmetric 2 percent inflation objective and potentially preventing a premature withdrawal of monetary policy accommodation.

In plain English, it means that the Fed is likely to tolerate inflation above its target for some time and it will not hike interest rates unless inflation rate surpasses 2 percent. The Fed’s dovish bias and reluctance to actively combat inflation are excellent news for gold which is considered to be a hedge against inflation. Higher inflation rate also mean lower real interest rates, which should be also supportive for the gold prices.

Second, the Fed expressed concerns about the next waves of the Covid-19 epidemic, which could additionally hit the US economy:

A number of participants judged that there was a substantial likelihood of additional waves of outbreaks, which, in some scenarios, could result in further economic disruptions and possibly a protracted period of reduced economic activity.

The recent epidemiological data suggests that the Fed officials’ worries were justified. As the chart below shows, on July 2, the number of daily new confirmed cases of the coronavirus in the U.S. was more than 52,000, surpassing the April peak and reaching a new record.

I don’t know how for you, but for me the second uptick definitely looks like the additional wave of outbreaks! And the July 4 holiday weekend, which was – as always – celebrated with barbecues and fireworks displays, could only add fuel to fire. Of course, this time the reaction of authorities and citizens could be different and less aggressive, but it’s hard for me to imagine that the resurgence of infections would not be negative for the GDP growth. Some states have already re-imposed restrictions or have slowed down reopening because of the resurgence of coronavirus cases. It means that the W-shaped recovery, rather than V-shaped rebound, is becoming more and more probable. Good news for gold! Of course, not necessarily in the very short term.

As we have repeated many times, the vivid recovery was never an option. Even without the second wave, the pace of economic growth would be slow after the initial rebound. As the FOMC admitted itself, “the recovery in consumer spending was not expected to be particularly rapid beyond this year, with voluntary social distancing, precautionary saving, and lower levels of employment and income restraining the pace of expansion over the medium term.”

Moreover, high level of uncertainty, subdued consumer demand, a dearth in public infrastructure projects, and low oil prices would constrain business investments, capital expenditures and new hiring. Hence, “participants concluded that voluntary social distancing and structural shifts stemming from the pandemic would likely mean that some proportion of businesses would close permanently”.

Implications for Gold

What does it all mean for the gold market? Well, the recent FOMC minutes show that the Fed will strengthen its forward guidance later this year. It may increase transparency of the American monetary policy and increase confidence in the Fed, which could be negative for the gold prices. However, given the U.S. central bank’s dovish bias, the forward guidance would probably imply low interest rates for a very long period, which should be supportive for gold prices. The fresh viral outbreak only increases chances of further economic disruptions and very accommodative monetary policy.

Moreover, the Fed may use forward guidance based on inflation, announcing lack of any interest rate hikes unless inflation will reach a certain level, which could be above the 2-percent target (the Fed officials have long dreamed of raising the target or overshooting, so now they have the perfect opportunity to officially allow for higher inflation!). Such forward guidance would be particularly positive for the gold prices, as the yellow metal is seen as a hedge against inflation which shine the brightest in an environment of low real interest rates.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD

Sunshine Profits: Analysis. Care. Profits.

Gold During Covid-19 Pandemic and Beyond

What a crazy six months! Let’s look at the chart below. As you can see, over the first half of the year, gold gained more than 16 percent, rising from $1,515 at the end of December 2019 to $1,762 at the end of June 2020.

The beginning of the year was, as usual, positive for the gold prices. However, gold did not rally in January as it did in just like in the previous years. Instead, it shot up in February amid mounting worries about the COVID-19 pandemic. After a short correction at the end of the month, probably due to the initial stock market crash, the price of gold jumped to $1,684 at the beginning of March, in the aftermath of the emergency FOMC meeting, when the Fed cut the federal funds rate by 50 basis points.

Then, when the most acute part of the global stock market happened and investors were selling everything to raise cash, the price of gold plunged below $1,500, bottoming out on March 19. But the rapid spread of the coronavirus, radically accommodative response of the Fed (including slashing interest rates to almost zero) and the implementation of economic lockdowns pushed gold prices to above $1,740 in mid-April (for the first time since late 2012). There was a sideways trend in the gold market with a yellow metal trading between $1,680 and $1,750 until the end of June, when the price of gold jumped above the ceiling.

How can we judge the gold’s performance during the first half of the year and the global epidemic in particular? Well, on the one hand, gold bulls might be a bit disappointed. After all, one could expect that the most impactful pandemic since the Spanish flu of 1918, together with the unprecedented stock market crash, the deepest recession since the Great Depression, and the reintroduction of the ZIRP and quantitative easing would push gold prices much higher. The gain of 16 percent is great, but in the first half of 2016 gold gained even more.

On the other hand, gold performed much better than many other assets. Although its price declined in March, the drop was relatively mild compared to the stock market crash (see the chart below) or the collapse in oil prices. Gold is actually one of the biggest beneficiary of the coronavirus crisis, confirming its role as a safe-haven asset and portfolio diversifier.

We have to also remember about three important features of the recent crisis, which limited gains in the gold market. First, there was a fire sale to get cash – and during panic no assets are really safe. In the aftermath of the Lehman Brothers’ bankruptcy, the price of gold also declined initially. Moreover, in March 2020, the U.S. dollar appreciated significantly, which put downward pressure on the gold prices, as the chart below shows.

Second, the coronavirus recession was very deep, but also very short. It means that investors started quickly to expect a bottom and the following rebound, which weakened the safe-haven demand for gold. In other words, the coronavirus crisis was more like a natural disaster rather than financial crisis or recession triggered by fundamental factors (although the global economy slowed down even before the pandemic and the U.S. repo crisis showed that the American financial system is quite fragile).

Third, the Fed’s response was quick and very aggressive, much more radical than in the aftermath of the Great Recession. The U.S. central bank’s decisive actions and implementation of many liquidity measures and unconventional monetary policies (as well as Treasury and Congress’ actions) managed to quickly restore confidence in the marketplace, spurring the appetite for risky assets rather than safe havens.

OK. But what’s next for the gold market? Well, the key to this question might lie in the chart below. As one can see, there has been a strong negative correlation between the gold prices and real interest rates. In March, the panic was so great that investors were selling even Treasuries, which pushed the bond yields higher, and send the price of the yellow metal down.

Now, the real interest rates are at very low, negative level, which should support the gold prices. The record low was -0.87 percent, so there is still some potential for going negative, especially given the ultra dovish Fed’s monetary policy.

However, with yields at such low level, there might be limited room for further downward move. So, unless we see a high inflation (or a significant second wave of coronavirus infections, or a softening of the greenback, for example, because of the sovereign debt crisis), we won’t expect a significant rally in gold prices (or there might be ups and downs on the way). Actually, if the real interest rates rebound somewhat, the yellow metal may struggle.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Steady Gold Amid Choppy Recovery

Initial jobless claims are declining painfully slowly. The disconnect between the choppy recovery and financial markets creates upward risk for gold.

The initial jobless claims still paint grim picture. They amounted to 1.48 million in the week from June 13 to June 20, as the chart below shows. While the number of Americans who applied for unemployment benefit have been systematically declining since late March, the number of people who applied for receiving jobless benefits barely fell from 1.57 million recorded at the beginning of June.

The falling back toward a pre-pandemic normal level is disturbingly slow (analysts expected lower number) and it casts doubt on the strength of the recovery. After all, millions of Americans are still losing their jobs each week! The so-called continuing claims have been also falling painfully slowly after peaking in mid-May. To some extent, the elevated level of new claims results from too generous unemployment benefits (for many people, being unemployed is more financially attractive that going to work), but in part, it may be caused by weak demand for labor. After all, many companies are now restructuring to adapt to a radically different post-pandemic environment. No matter the reason, fewer people having job is always troublesome for the economy.

Importantly, the resurgence of new Covid-19 infections in many states could make the recovery even weaker, forcing the businesses to scale back and fire people again, if authorities tighten sanitary regulations or consumers start to distance socially again.

Disconnect Between Real Economy and Financial Markets

Given the choppy recovery, the disconnect between real economy and the financial markets has probably never been greater. And, as the International Monetary Fund’s update on the global financial stability noted last week, the gap between the bullish mood among investors and the enormous uncertainties about the path of the economic is a serious risk to global financial stability:

Amid huge uncertainties, a disconnect between financial markets and the evolution of the real economy has emerged, a vulnerability that could pose a threat to the recovery should investor risk appetite fade (…) This decoupling raises questions about the possible sustainability of the current equity market rally if not for the boost of sentiment provided by central bank support.

Indeed, market valuations appear stretched and “the difference between market prices and fundamental valuations is near historic highs across most major advanced economy equity and bond markets.” Hence, many developments, including the tightening of monetary policy or the resurgence of coronavirus infections, could trigger a repricing of risky assets, which could destroy the economic recovery.

According to the IMF, another important risk for the financial system is high indebtedness, as debts may become unmanageable for some borrowers:

aggregate corporate debt has been rising over several years to stand at historically high levels relative to GDP. Household debt has also increased, particularly in countries that managed to escape the worst impact of the 2007-8 global financial crisis. This means that there are now many economies with high levels of debt that are expected to face an extremely sharp economic slowdown. This deterioration in economic fundamentals has already led to the highest pace of corporate bond defaults since the global financial crisis, and there is a risk of a broader impact on the solvency of companies and households

Implications for Gold

What does it all mean for the gold market? Well, the weaker and more choppy the rebound, the better for gold, as the fragile recovery should assure elevated safe-haven demand for gold. Similarly, the larger gap between the real economy and financial markets, and the longer it lasts, the greater possibility of the financial crisis. In such environment, the yellow metal is an attractive portfolio diversifier, so we would not be surprised if gold crosses $1800 per ounce in the foreseeable future.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Coronavirus Strikes Back. But Force Is Strong With Gold

We all fear the second wave of infections. But the U.S. hasn’t even controlled the first one! Bad news for Americans, but good news for gold.

Please take a look at the chart below. As you can see, the epidemiological situation in the United States does not look well. The number of new daily confirmed Covid-19 cases has been rising again since mid-June, which means that coronavirus is far from being contained. Actually, the number of new cases has almost reached a new record level!

Sadly, the number of daily deaths has also increased recently, as the chart below shows. The spike resulted from the change in methodology, but even without it, the downward trend has probably ended. Luckily, as now young people are mostly among the newly infected, the case fatality rate could be lower than in April.

Who could suppose that hasty reopening of economies without proper testing and contact tracing, and mass riots could cause the second wave of infections? Actually, this is what I was afraid of. At the beginning of June, I wrote:

the mass protests during the pandemic is, um, well, not something what epidemiologists dream of. You don’t have to be a scientist to deduce that big demonstrations and large gatherings – and many protesters do not even wear masks – could accelerate the viral spread and increase the chances of the second wave of infections, or at least, hamper the deceleration of the epidemic.

I mentioned today the second wage of infections. But actually America does not deal with the second wave. The U.S. could not even cope with the first wave! And, oh, just as a reminder, we are talking about the wealthiest country in the world!

The charts above present nationwide data. But situation in certain states is actually much worse. The number of new cases and hospitalizations are quickly accelerating in several states, which is going to be problematic for the economy and the markets. For example, Texas halted its reopening because of the resurgence of Covid-19 infections and hospitalizations.

Meanwhile, in New York, Governor Andrew Cuomo introduced quarantine for everyone coming from eight states suffering from the most intense resurgence of the coronavirus – Alabama, Arizona, Arkansas, Florida, North Carolina, South Carolina, Texas and Utah – and delayed the reopening of malls, gyms, and cinemas.

Moreover, some companies either has closed their stores (like Apple in Houston) or delayed the reopening of their premises (like Disney and its theme parks in California). Such actions hit, of course, the economy. For example, the U.S. economic recovery tracker developed by Oxford Economics showed a small deterioration in the week ending June 12 after 10 weeks of improvement. Hence, after a strong initial phase of recovery, we could enter a period of slower phase, or even a reversal, if the recent resurgence of Covid-19 infections accelerates and gets out of control.

Implications for Gold

What does it all mean for the gold market? Well, the longer and more severe the pandemic, the better for gold. The resurgence of infections implies the delayed rewind of the Great Lockdown. The more delayed the full economic unlock, the slower the recovery. Moreover, the accelerated spread of the coronavirus could trigger the reimplementation of lockdowns or other containment measures. In such a scenario, another stock market crash is likely. Gold could benefit then at the expense of risky assets. But the fire sale of equities could also pull gold down, at least initially. Another downward risk for the gold market is the strengthening U.S. dollar when turmoil hits. On Thursday, the greenback appreciated, while the price of the yellow metal declined. However, over the longer run, it seems that gold will remain an attractive safe haven for investors (and it can even gain more value) until the pandemic is over and the global economy recovers fully.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

High Premiums in Physical Gold Market: Scam or Supply Crisis?

During the coronavirus crisis many people couldn’t find physical gold, as there was a bullion shortage at dealerships. And these lucky individuals who managed to obtain bullion had to pay high premiums. We invite you to read our today’s article about the high premiums in physical gold market during the pandemic and find out whether they were indicated scam or supply crisis.

High Premiums in Physical Gold Market: Scam or Supply Crisis?

Gold is expected to serve as a safe-haven asset. But during the coronavirus crisis many people couldn’t find physical gold, as there was a bullion shortage at dealerships. And these lucky individuals who managed to obtain bullion had to pay high premiums. What a safe haven that people can’t find? And does not the price divergence between physical and paper gold show the price manipulation in the latter market? Let’s analyze what really happened in the bullion market during the coronavirus crisis.

First of all, gold was perceived as a safe haven – and this is why it was in such high demand. Since the dawn of civilization, people turn to gold to protect their savings when they are worried about the future. The yellow metal was demonetized in 1971 when President Nixon closed the gold window, ending the gold standard, but gold never lost its position as a store of value. It should not be surprising, as gold was used as money for thousands of years and it has no counterparty risk.

However, that high demand did not meet with sufficiently increased supply. You see, the coronavirus crisis is both the negative demand and supply shock. Many supply chains were broken. The quarantine, labor absenteeism, travel limitations and other measures undertaken to prevent the spread of the coronavirus disrupted the normal, smooth functioning of the economic engine. And it applies to the mints and refiners which simply could not work at full capacity. The bullion coin you see in the retail store is a highly sophisticated product which had to be earlier minted, refined and transported, which can be logistically challenging even in normal times, but it became really difficult during the Great Lockdown.

This is the reason behind the supply shortage and high premiums. They do not necessarily prove manipulation in the paper gold market. Rather, refineries and mints stopped operating or capped production because of the collapse in global travel and shutdowns of local economies. Remember that three important gold retailers – Valcambi, Pamp and Argor-Heraeus – are all based in the Swiss region of Ticino, near the border with Italy, that was quickly shut down at the beginning of the current pandemic.

Investors should remember two things here. First, there is always a certain premium on retail gold, as bullion dealers live on these premiums. One cannot have “spot gold”, so if somebody wants to own physical gold, he or she has to pay premium. After all, small and beautiful bullion coins or bars add some value and there are costs involved in producing them. Yes, during the coronavirus crisis these premiums soared, sometimes to 10-15 percent or even more over spot prices. But the havoc was unique: exploding demand and disrupted production and distribution chain at the same time.

Second, the markets are not homogenous, but heterogeneous – they are many segments on each market. Just as there is no single labor markets, but many labor markets (one for IT specialists, another for waiters, etc.), there is no single gold market. So, prices in these markets may differ, which is pretty normal (you don’t expect that the salary of IT specialists will be equal to waiters’ pay, do you?). After all, the LBMA Gold Price is a snapshot of gold prices quoted by traders in the London OTC spot market for wholesale transactions (and spot price might be even something else, as it is derived from the futures prices quoted in Comex), while the price offered by bullion dealers is the market price of physical bullion in retail trade.

Hence, there might be plenty of gold in a big trading hub like London, as there might be more sellers in the institutional market during the asset selloffs. And big fish typically use large bars of 400 ounces. The big ETFs and central banks do not buy gold at local bullion shops – they buy large gold bars by the truckload. This is why the size of different products is an important reason for the price discrepancy. Such large gold bars are beyond the reach of regular people, who prefer kilobars, one ounce bars and coins, or even smaller products. So they have to pay premium for the possibility to get gold products suitable for their shallow pockets.

Summing up, the bullion shortage and high premiums in the retail market do not prove manipulation in the gold market. They result from the market segmentation and supply disruption together with the explosion in demand for retail gold. But these shortages and high premiums do not have to impact the gold spot price, which is shaped in different segment of the gold market and by different factors. This is why London gold prices could go down during the stock market selloff, as the chart below shows, simultaneously with gold shortages in the retail market.

Chart 1: Gold prices (London P.M. Fix) from January 2 to June 1, 2020

To be clear, it doesn’t mean that the price of gold will not go up. We actually consider gold’s fundamentals to be bullish. But if gold prices appreciate, they will not do it because of the bullion boom in the retail market, which is a small fraction of the whole gold market, but because of stronger fundamentals and better sentiment among bigger players.

If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Trading Alerts.

 

Gold Likes the IMF Predicting a Deeper Recession

The June edition of the IMF’s World Economic Outlook Report Update is out! The main message is that the IMF predicts now even a deeper recession than two months ago.

As a reminder, in April edition of the World Economic Outlook Report, the IMF projected that the global economy would contract sharply by 3 percent this year, while the U.S. economy would plunge 5.9 percent. When it comes to 2021, the IMF projected 5.8 percent growth for the global economy and 4.7 percent for the U.S.

Many analysts cheered the vigorous pace of recovery expected by the IMF. I did not. I remembered that the IMF’s projections are always too optimistic, so I remained skeptical. That’s I wrote:

If something seems too good to be true, it probably is. To be sure, there are many reasons for optimism. In some countries, the number of new cases has come down. And the unprecedented pace of work on treatments and vaccines also promises hope. However, the IMF’s base scenario assumes basically the V-shaped recovery, which is not likely to happen.

As long the society does not have herd immunity, the economy will not simply return to normal, pre-pandemic life. And if history of previous deep downturns is any guide, the reduced investment, employment and commercial bankruptcies will leave long-term scars on the economy.

It turned out that the IMF was wrong and I was right. In the newest report, the Fund expects that the global economy will drop 4.9 percent this year (almost two percent below the April’s forecast!) and that it will expand only 5.4 percent in 2021. When it comes to the U.S. economy, the IMF projects that it will plunge 8 percent (more than two percent below the April’s forecast!) and that it will recover just 4.5 percent in 2021.

It means that the global and the U.S. economies are likely to experience their worst recessions since the Great Depression, far worse than the financial crisis of 2007-2009, and that they will turn out to be deeper than previously expected, while the pace of recovery will be more gradual than previously forecasted.

Indeed, as the chart below shows, the U.S. GDP will not return next year to the pre-pandemic level. It will happen in 2022 or maybe even in 2023. So, please forget about the V-shaped recovery, especially since that even these projections may be too optimistic.

Implications for Gold

What does it all mean for the gold market? Well, deeper recession and slower recovery are good news for gold, which shines the most during the period of economic crises and subdued economic growth, especially in the early stages of expansions.

Moreover, the grimmer IMF’s report, combined with the rising number of daily new cases of Covid-19 in the U.S. (see the chart below), could decrease the risk appetite and increase the demand for safe-havens such as gold.

Indeed, the S&P 500 Index declined yesterday, while the price of gold surged to its highest in nearly eight years (as the chart below shows). The downward revision of economic projections and the resurgence of coronavirus in America clearly show that “we are definitely not out of the woods”, as Gita Gopinath, the IMF’s chief economist, put it.

And the coronavirus crisis will also generate medium-term challenges, as we repeated many times. In particular, the already high indebtedness will become even higher. According to the IMF, the public debt will reach this year the record high level, in both developed and developing countries. The global public debt is forecasted to jump above 101 percent, almost 20 percentage points above 2019 level. Such an abrupt rise increases the odds of a sovereign debt crisis and pressure for interest rates to remain at ultra-low levels. Such environment looks fundamentally positive for the gold prices.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

Do Jobless Claims Point to Sluggish Recovery and Accelerating Gold?

Jobless claims paint a much grimmer picture than other pieces of economic data. So, the Fed (and other central banks) will remain dovish for years, which should support gold prices.

More and more economic reports show the beginning of the economic recovery in the U.S. Following the retail sales earlier last week, the Philly Fed Manufacturing Index turned from negative 43.1 in May to positive 27.5 in June, the first positive reading since February. And the Leading Economic Index rose 2.8 percent in May, after a record plunge in the two prior months.

However, the initial jobless claims paint a much grimmer picture. They amounted to 1.5 million in the week from June 6 to June 13, as the chart below shows. While the number of Americans who applied for unemployment benefits has been systematically declining since late March, the number of people who applied for receiving jobless benefits barely fell from 1.56 million in the previous week.

Indeed, although initial claims are slowly falling back toward a pre-pandemic normal level, it is taking an agonizingly long time. Despite the surprisingly positive May nonfarm payrolls, the initial claims suggest that there is no quick recovery in the U.S. labor market.

The continuing claims, which count the number of people who have already filed for initial claims and who have experienced a week of unemployment, and then filed a continued claim for benefits for that week of unemployment, also show a frustratingly slow rebound in the U.S. employment. As one can see in the chart below, the number peaked at nearly 25 million in May, barely declining to 20.5 last week.

The potential explanation is that there is the second wave of layoffs, which keeps the number elevated, hampering the pace of economic recovery. Hence, investors should take with a pinch of salt the unemployment rate having fallen to 13.3 percent in May to reflect the true state of the U.S. labor market. Reality is much worse – which is actually good news for the gold market.

Central Banks and Gold

On Wednesday, Powell testified for the second straight day to Congress. He reiterated his previously stated views – in particular, Powell reemphasized that the Fed will not hike interest rates for years: “We’re thinking that this economy is going to need support from monetary policy for an extended period of time,” he said.

It seems that the American central bankers are not worried about the potential inflation at all. In a recent speech at the Foreign Policy Association in New York, Richard Clarida, Fed Vice Chair, said that the coronavirus crisis will be disinflationary, not inflationary:

while the COVID-19 shock is disrupting both aggregate demand and supply, the net effect, I believe, will be for aggregate demand to decline relative to aggregate supply, both in the near term and over the medium term. If so, downward pressure on PCE (personal consumption expenditures) inflation, which was already running somewhat below our 2 percent objective when the downturn began in March, will continue.

Given Clarida’s prominence, it seems that the Fed will be indeed very dovish for years, which should support the gold prices.

But not only the Fed. In June, the ECB expanded its emergency program in size and duration. The Pandemic Emergency Purchase Program will be increased by €600 billion to a total of €1,350 billion and it will be extended until at least the end of June 2021. Similarly, the Bank of Japan increased the nominal size of its aid for businesses struggling because of the pandemic from about $700 billion to $1 trillion.

Implications for Gold

What does it all mean for the gold market? The low inflation and still very harsh situation in the U.S. labor market imply that the Fed will remain very accommodative for years to come. The same applies to the Bank of Japan and the ECB. The rising central banks’ balance sheets and the ZIRP should support gold prices. However, the flush of liquidity may also boost risky assets, while the dovish ECB’s monetary policy could weaken the euro and gold against the U.S. dollar.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Will the Second Wave Trigger Rally in Gold?

The initial health crisis seems to be under control in many countries. But this is not the end of pandemic and many epidemiologist warn against the second wave of injections. We invite you to read our today’s article about the second wave of the new coronavirus and find out whether it will trigger rally in gold prices.

Will the Second Wave Trigger Rally in Gold?

The initial health crisis seems to be under control in many countries, including the US. The situation is stabilizing and the governments are easing quarantine restrictions. And, importantly, the number of daily confirmed deaths in the US has peaked in April and has been declining since then, as the chart below shows.

Chart 1: The number of daily confirmed cases in the United States (as a rolling 7-day average) from December 2019 to June 2020

However, this is not the end of the epidemic. Many epidemiologist warn now against the second wave of infections, especially if people stop distancing socially too quickly. For example, Dr. Zhong Nashan, a leading Chinese epidemiologist, has recently said that a lack of immunity among Chinese residents could be a cause for concern in spurring another wave of infections. Are these warnings sensible and what do they imply for the gold market?

Nobody knows for sure. On one hand, as people put themselves into quarantine long before the governments mandated them to do, they are likely to socially distance even after the Great Unlock. Thus, the second wave may never arrive. Instead, we will have one but prolonged wave with steady influx of new infections.

On the other hand, for the pandemic to disappear, we need herd immunity, so more than half of the population (at least half, as we could need even 70 percent) would have to be immune either from a prior infection of from a vaccine. And we have bad news here. The vaccine will not arrive in the very near future, while we are still a long way from developing the herd immunity. According to the recent Spanish study, only five per cent of Spain’s population has been infected, so far. In the US, even in the hardest-hit communities like the New York state, only 14 percent of residents have been infected at some point by the coronavirus. These results are really frightening, as they show that the disastrous outcomes in Spain or New York are not even close to the worst-case scenario.

It means that either societies will distance socially until the vaccine arrives, which could be difficult due to the economical and psychological constraints, or the second wave is inevitable.

History also suggests that the second wave is possible. After all, historians have counted eighteen waves of the bubonic plague of Justinian, although over more than two hundred years, stretching from 541 to 750. More recently, the Spanish flu attacked in three waves (in some areas even in four waves), partially because the authorities eased the restrictions too early. Please remember that the second wave of the 1918 pandemic was much more deadly than the first one.

And, when it comes to the coronavirus, all countries that seemingly contained the virus – Germany, Japan, Singapore, and South Korea – were hit by the second wave, although a not very large one, as the chart below shows, but these countries were adequately prepared to combat COVID-19 from the very beginning.

Chart 2: Daily confirmed Covid-19 cases in Germany (purple line), Japan (blue line), Singapore (grey line) and South Korea (red line)

 

What would the second wave mean for the gold prices? Well, assuming a similar impact as in the first wave, the price of gold should go up, but not before plunging. Given that the yellow metal appreciated around 8 percent since the stock market crash on February 20, 2020, gold price could ultimately (after a not inevitable from the fundamental point of view, but certainly a possible – decline) reach almost $1,900, assuming another 8-percent upward move.

However, the second wave does not have to bring similar effects as the first wave. As people have become accustomed to the epidemic, its impact may be weaker. The second wave may be also partially already priced into gold. And just as the simple SIR models of the epidemic turned out to be too gloomy, the second wave may be less deadly than many epidemiologists fear. Such a scenario would be less favorable for gold and we could see some correction then, although the fundamental outlook should remain bullish.

On the other hand, given the level of complacency in the US stock market and still common hopes for the V-shaped recovery, the second wave of infections might be like a cold bucket of water poured onto heated investors’ heads. Such a scenario seems to be more positive for the gold market, although initially the price of gold could drop together with the stock market.

Which scenario is more probable? I wish I knew! But generally people react the most to new, unknown threats, so they should react less vividly in the future to coronavirus-related risks, especially that the authorities should be better prepared. Remember quantitative easing? The first round was very supportive for the gold prices, while the last one not so much. Similarly, the subsequent rounds of infections could have less and less impact on the financial markets. However, some people are already fed up with the epidemic and hope that life is getting back to normal. The second wave could crash these hopes, especially if it is worse than the first one, as was the case with the Spanish flu.

Anyway, one thing is certain, life is not likely to be completely “normal” for a significant time, perhaps until a vaccine is widely distributed. And gold prefers such abnormal, exceptional times more than boring business as usual!

If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Trading Alerts.

 

Surging Retail Sales, Cautious Powell, and Gold

Retail sales came in really strong in May, which could strengthen risk appetite, but the dovish Fed should support gold.

As the chart below shows, retail sales surged 17.7 percent in May, as the U.S. economy started to reopen. The number was a record high and above expectations, triggering optimism in the marketplace.

However, the sales were still 6 percent lower than a year ago, which means that the coronavirus crisis has not ended yet. But such reports may, nevertheless, increase the risk appetite among investors at the expense gold and other safe havens.

Another sign that the US economy began to revive in May, was the increase in industrial production by 1.4 percent, as many factories resumed operations. However, the number came below expectations, and the industrial production was still 15.4 percent below its pre-pandemic level, as one can see in the chart below.

Powell’s Testimony and Gold

On Tuesday, Powell testified before the Senate Banking Committee. His prepared testimony was not much different than from his earlier remarks during the press conference after the June FOMC meeting. Powell reiterated his cautious view about the economic outlook and that he does not expect a V-shaped recovery:

“the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery. Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it. Until the public is confident that the disease is contained, a full recovery is unlikely. Moreover, the longer the downturn lasts, the greater the potential for longer-term damage from permanent job loss and business closures.”

Therefore, according to Powell, investors should not overreact to surprisingly good economic data such as the May nonfarm payrolls or retail sales report. He said that the economy would go through three stages: economic shutdown, the bounce-back as people return to work and the economy “well short” of the pre-pandemic level in February. In other words, we are at the beginning of rebound, and many economic reports may be very positive, but it should not be actually surprising as they are coming off extremely low levels. What is crucial here is how will the economy evolve later.

The new thing Powell said was admission that the latest Fed’s dot plot does not factor in a potential second wave of coronavirus infections later this year, which is rather concerning. When asked by Senator Krysten Sinema whether “Does this projection assume a potential second wave of coronavirus and the accompanying economic impacts?”, Powell replied:

I would think the answer to your question, though, largely will be that … my colleagues will not principally have assumed that there will be a substantial second wave.

It means that the potential resurgence of coronavirus in the second half of the year would alter the Fed’s stance into being even more dovish, which could be positive for gold prices.

Implications for Gold

What does it all mean for the gold market? In his testimony, Powell reemphasized that the Fed will be very accommodative for a long period of time, with potentially being even more dovish if the second wave of infections occur. The U.S. central bank is not concerned about inflation, but about lack of growth and unemployment rate. Although the upcoming economic data could be very positive due to the very low base, investors should not overreact and remember that there is still long way to recovery.

This is, however, what they should do. But they don’t. The market is ignoring the bad news and focusing on the positives. After all, things turned out to be not so apocalyptic as the initial March assessment suggested. Moreover, the interest rates and bond yields are ultra low, while the Fed stands ready to intervene, which increases market confidence. The optimism among investors is a bad things for gold prices, but negative real interest rates and very accommodative central bank should support the yellow metal, as the chart below shows.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Low Inflation Makes Powell a Dove. How It Affects Gold?

The US CPI inflation rate declined 0.1 percent in May, following a 0.8 percent drop in April. The decrease was mainly driven by decreases in energy, transportation and apparel prices. The core CPI also declined 0.1 percent, following a 0.4 percent drop in April. It was the third consecutive monthly decline, which happened for the first time in history of the index that starts in 1957. Anyway, compared with the previous month, we see some stabilization of disinflation forces, at least on a monthly basis.

On annual basis, the overall CPI increased just 0.2 percent (seasonally adjusted and merely 0.1 percent without the seasonal adjustments), following 0.4 percent increase in April. It was the smallest 12-month increase since October 2015. The core CPI rose 1.2 percent over the last 12 months, compared to the 1.4 percent increase in the previous month. It was the smallest increase since March 2011. Both indices are substantially lower than a few months ago. The chart below shows these disinflationary trends.

The softening inflation could theoretically reduce the demand for inflationary hedges, but it also means that the Fed will remain dovish for years, which should support gold prices overall.

Powell’s Press Conference and Gold

In last edition of the Fundamental Gold Report, I mentioned the last Powell’s press conference, but I would like to point out a few more things. First, he said that the Fed is considering to target the yield curve, similarly to the Bank of Japan. If adopted, such policy should imply ultra low interest rates for longer, supporting the gold prices.

Second, Powell signaled also that the interest rates will remain low at least until the unemployment rate will not return to normal:

So, I think we have to be humble about our ability to move inflation up, and particularly when unemployment is — is going to be above most estimates of the natural rate for — certainly above the median in our — in our — in our SEP, well through the end of — past the end of 2022.

It means that even if inflation goes up, the Fed will not react in a hawkish manner as long as unemployment rate is below the natural rate of unemployment. Given that inflation has recently declined, the Fed’s dovish bias is almost certain. And what is important here is that Powell expects a significant slack in the labor market. In other words, the coronavirus crisis will lead to permanent job losses:

My assumption is that there will be a significant chunk — chunk, well into the millions. I — I don’t want to give you a number because it’s going to be a guess, but well, well into the millions of people who — who don’t get to go back to their old job and in fact, there isn’t a — there may not be a job in that industry for them for some time. There will eventually be, but it could be some years before we get back to those people finding jobs

Third, Powell is worried about the second wave of coronavirus cases. He believes that it might be another factor behind the gradual recovery, not necessarily a V-shaped one:

I think, that if a — if it happens — you know, the — the issue would be, first of all, people’s health, but secondly, you could see a public loss of confidence in — in parts of the economy that will be already slow to recover, so it could hurt the recovery, even if you don’t have a national level pandemic, just a — just a series of — of local ones — of local spikes could — could have the effect of undermining people’s confidence in traveling, in restaurants, and entertainment, anything that involves getting people together in small groups, and feeding them, or flying them around, those things could be hurt. So, it would not be a positive development, and I’ll just leave it at that.

And Powell might be right. As the chart below shows, the number of the US daily cases have been rising recently, probably due to massive riots on American streets.

Implications for Gold

What does it all mean for the gold market? The recent Powell’s press conference indicating that there is still a long way to recovery was a cold water for many stock market investors (but not for our Readers, as we have been warning for many weeks that the investors’ optimism about the V-shaped recovery may be not really founded in reality). People also started to worry that new virus infections could stunt the pace of the economic recovery. In consequence, both the Dow Jones and S&P 500 indexes suffered their biggest weekly percentage declines since March. The weaker risk appetite should be positive for safe-haven assets such as gold. Moreover, lower inflation with uncertain recovery imply a dovish Fed and the ZIRP to stay with us for years, which – from the fundamental point of view – should also support the gold prices.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

What Does The Great Disconnect Imply for Gold?

It seems that global stock markets have disconnected from the fundamental reality. They have been rising since the end of March despite the collapsing economies and soaring unemployment. We invite you to read our today’s article about the Great Disconnect and find out what does it imply for the gold prices.

What Does The Great Disconnect Imply for Gold?

It seems that global stock markets have disconnected from the fundamental reality. They have been rising since the end of March despite the collapsing economies and soaring unemployment. Why? And what does it imply for the gold prices?

Let’s start with the brief review of the economic reality, focusing on China, as the country offers a preview of what is likely to happen in the West a bit later. In April, the industrial production grew 3.9 percent year-over-year, following the 1.1 percent decline in March, as the chart below shows. This is very good news for China’s economy. However, it might be too early to trump the full recovery. As a reminder, the industrial production in December 2019, before the outbreak of the pandemic, rose 6.9 percent.

Chart 1: Industrial production in China from April 2019 to April 2020.

And the domestic demand remains very weak: the retail sales in China dropped 7.5 percent in April from a year earlier. Moreover, investment fell 10.3 percent in the January-April period on an annual basis, a modest improvement from the 16.1 percent drop posted in the first three months of the year, but still a negative growth below expectations.

The official unemployment rate reached 6 percent, up from 5.9 percent in March and just shy of February’s record of 6.2 percent. Of course, the true unemployment rate is likely twice as much as the official rate does not include people in rural communities and migrant workers. And remember that the global economy is expected to contract 3 percent in 2020, so this decline will negatively hit China, which is the world’s factory.

And there are also significant downside risks on the way to full normalization, with the risk of the second wave of the coronavirus and resulting reemergence of lockdowns being the most important threat for the steady economic recovery. Actually, this is actually materializing right now. According to the Bloomberg News, more than 100 million people in China’s northeast region, Jilin province, are once again under lockdown restrictions after new cases of COVID-19 have recently emerged.

The situation might be even worse, as the Financial Times’ China Economic Activity Index in mid-May was still below 80, where 100 is level seen on January 1, 2020. Many of its subindices, such as coal consumption, air pollution, container freight or box office numbers, remain subdued.

The conclusion is clear: China – and Western countries as well – can forget about the V-shaped recovery, as we have long ago warned. Instead, we could see a U-shaped recovery, which is deeper and more prolonged, or even a L-shaped recovery, which is even slower, although it might be too pessimistic a forecast. Or, there might be actually a mix of V, U, and L: in some industries the recovery will be quicker, while in certain industries – think airlines – it will be slower. Another possibility is that the recovery will look like W, i.e., there will be a rebound in one or two quarters, followed by another dip because of the second wave of epidemic.

The W-shaped recovery seems to be the most positive scenario for the gold market, as the second wave of injections would imply renewed worries and shaky economy. The slow recovery – U-shaped or L-shaped – will be better for the yellow metal than V-shaped, but they would not have to cause a rally in gold. After all, in the aftermath of the Great Recession, the recovery was very sluggish, but gold entered the bear market in 2011.

However, the performance of the global equity markets suggests that investors are rather optimistic about the future, at least this is the popular interpretation. Despite rising COVID-19 infections and deaths and the Great Lockdown, despite the collapsing economy and skyrocketing unemployment, the S&P 500 Index has been rising since March 23, as the chart below shows. We know that the stock market is not the real economy and that stock markets are forward-looking and do not want to fight the Fed, but the disconnect is troubling. After all, Mr. Market is not always correct – for example, it overlooked the risk of Covid-19 pandemic.

Chart 2: S&P 500 Index (green line, left axis) and Dow Jones (red line, right axis) from January 2 to June 2, 2020

But the rising S&P 500 Index does not have indicate strong recovery on the horizon. This is because the rebound in the S&P 500 was driven by selected few companies, i.e., Microsoft, Apple, Amazon, Alphabet, and Facebook – the relative winners during the Great Lockdown that forced people to shift into the online world. Moreover, the behavior of cyclical commodities and bond yields suggest rather weak recovery.

What does it mean? Well, the fundamental outlook does not bode well for equity markets. Given the expected decline in the GDP, the earnings per share for companies listed on the S&P 500 will likely fall by 10-20 percent versus expectations from the beginning of 2020. So, the stock market capitalization from end of May of about 3,000 implies the P/E is higher than before the pandemic! Maybe we should believe more in the collective wisdom of the crowds, but today’s equity valuations appear to be at odds with the fundamental reality. The selected few companies will not drive the broad market forever.

We do not say that the stock market crash is imminent, but rather that at least a correction might happen, which could be positive for the gold prices, although the initial downward move could pull the yellow metal down. In other words, investing in the stock market seems to be risky right now given that the V-shaped recovery is unlikely and given elevated equity valuations, so adding gold, which is good portfolio’s diversifier, to the portfolio might be a smart move.

If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Trading Alerts.

 

Should Gold Bulls Celebrate the Persistent ZIRP?

Yesterday, the Fed issued the statement from the FOMC meeting on June 9-10. The statement is little changed from the April edition. Nevertheless, there are two important differences. First, the members of the Committee have acknowledged the improvement in the economic situation since April, as they wrote that “financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.” Moreover, according to new wording, the virus and the measures taken to protect public health “have induced” (instead of “are inducing” in April) sharp declines in economic activity and a surge in job losses.

Second, the Fed used a subtle forward guidance, reassuring the market participants that the quantitative easing will not end or even be tampered with anytime soon. Perhaps to avoid taper tantrum, the FOMC wrote:

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

What does it mean for the gold market? On the one hand, the Fed’s balance sheet is already massive, as the chart below shows. Indeed, the US central bank’s assets have surpassed $7 trillion in May and they are expected to rise even to around $10 trillion because of the coronavirus crisis. So, the Fed’s intention to increase it at least at the current pace should raise it even more, spurring worries about the unconventional monetary policy and possibly support gold prices.

On the other hand, the Fed’s forward guidance and end of steady tapering of asset purchases could reassure the Wall Street that the party of easy money and unlimited liquidity is going to last. The tap with cheap money will not be turned off anytime soon, or it can be even unscrewed wider – so, the FOMC statement could support risk appetite and risky assets at the expense of safe-haven assets such as gold. However, it seems that positive impact triumphed as gold prices rose yesterday amid the dovish FOMC statement, as the chart below shows.

June FOMC Projections and Gold

The FOMC issued yesterday not only the statement of its monetary policy, but also its fresh economic projections. Not surprisingly, all projections are much more pessimistic compared to December. The GDP growth and inflation will be lower, while the unemployment rate higher, as the table below shows.

For example, the FOMC expects that the GDP will decrease 6.5 percent in 2020, increase 5 percent in 2021 and 3.5 percent in 2022, compared to positive 2 percent, 1.9 percent and 1.8 percent expected in December. What is important here, is that although the Fed sees recovery next year (which is normal, given the low base in 2020), the projections do not paint the V-shaped recovery, as the GDP will return to its pre-pandemic level only in 2022. As Powell said during his press conference “We all want to get back to normal, but a full recovery is unlikely to occur until people are confident that it is safe to reengage in a broad range of activities.”

This is rather good news for gold.

The unemployment rate is expected to be 9.3 percent in 2020, 6.5 percent next year and 5.5 percent in 2021, versus 3.5-3.7 percent range seen in December projections. These are also quite positive projections for gold prices, as the unemployment rate is not expected to even return to its pre-pandemic level.

When it comes to PCE inflation, the FOMC sees muted inflation in 2020 (0.8 percent rate instead of 1.9 percent projected in December), and rebound in next years to 1.6 and 1.7 percent (versus 2 percent in both years forecasted in December). Lower inflation rates could reduce the demand for gold as an inflation hedge. However, the FOMC projects that inflation rates will be below its target, which will provide an excellent excuse for continuation of its dovish monetary policy, thus supporting gold prices.

Last but not least, the Fed sees its federal funds rate to remain near zero at least until 2022. As Powell said during the press conference “We’re not even thinking about raising rates,” Fed Chairman Jerome Powell told reporters.” This is also good news for gold from the fundamental point of view, which thrives under ZIRP and very low real interest rates.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Will US Labor Market Recovery Sink Gold?

The recent job report is not reliable, but it shows recovery in the US labor market. The situation is still bad, but optimism could triumph for now, which is bad for gold.

On Friday, the Bureau of Labor Services released the newest edition of the Employment Situation Report. The publication shows that the US economy regained 2.5 million jobs in May, constituting the biggest nonfarm payroll surprise in history. Indeed, the economists polled by MarketWatch had forecast a loss of 7.25 million jobs. The rebound is presented in the chart below.

Meanwhile, the analysts expected that the unemployment rate would rise to 19 percent from 14.7 percent in April, but it declined to 13.3 percent, as one can see in the next chart. The report, if reliable, signals that the postpandemic recovery has begun, as the charts below show.

Not surprisingly, the stock market reacted euphorically, with the S&P 500 Index jumping more than 2.5 percent on Friday, while the price of gold dropped below $1,700.

But is the situation in the US labor market indeed so rosy? Not quite. After all, even if the data reported by the BLS is reliable, the number of working Americans is about 20 million lower than before the pandemic, and the unemployment rate is still at the highest level since the Great Depression. So, there is still a long way to go until the labor market returns to normalcy.

But it’s not even the case that the recovery has really begun. You see, the report is not reliable. And the BLS admitted itself, writing that

If the workers who were recorded as employed but absent from work due to “other reasons” (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported.

In plain English, it means that the BLS incorrectly described the job status of millions of people and without such an error, the unemployment rate would be not 13.3 percent, but 16.3 percent. So instead of decreasing – suggesting the start of the recovery – it would rise further since April.

The ADP report released earlier in the week, based on data directly from the employers themselves, showed almost 3 million more lost jobs, not a gain in jobs. The number was also better than forecasts, but significantly worse than the BLS data.

Initial claims also do not indicate the rebound in the US labor market. As the chart below shows, each week since the outbreak of the pandemic, a few millions of Americans applied for the unemployment benefits – and more than 42 million in total wanted to become unemployed, implying a bleaker situation in the US labor market.

Implications for Gold

What does the recent Employment Situation Report imply for the gold market? The headlines are very positive, implying that the recovery started earlier than expected. It should spur more optimism among investors, which could further fuel the rally in the stock market, while weakening the safe-haven demand for gold.

However, the BLS data is not completely reliable and the real unemployment rate likely exceeds 16 percent. The government wrongly classified millions of people as “employed but not at work” instead of “unemployed on temporary layoff”. Hence, the labor market is still in a terrible spot, so investors should remain cautious.

In the short run, the optimistic narrative could triumph in the marketplace. After all, the reopening of state economies in May should start the economic recovery. But we will see what the more distant future will bring. The second wave of infections is still possible and after all these riots in the US make it even more probable. Nevertheless, the risk appetite should strengthen now with the positive (although partially fake) job report, which is bad news for the gold market.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Will Great Unlock Push Gold Prices Down?

As Great Lockdown was positive for the gold prices, the Great Unlock will be bad, right? We invite you to read our today’s article about the Great Unlock and find out whether it really must be negative for the gold prices.

It’s all government’s fault, right? After all, the Great Lockdown was introduced by the federal and state governments introduced, wasn’t? Well, not quite.

Before I will explain why, let me clear one thing up: I’m a liberty lover and I’m skeptical about the government regulations. And the economic shutdown was obviously untenable – the only reason to shut down the economy was to buy some time to prepare the healthcare system for better handling of the epidemic. So, it’s good that the Great Lockdown is ending.

However, the truth is that the economic shutdown was only partially triggered by the government. While in part it was caused by the bottom-up actions of millions of people who were afraid for their health. Indeed, the data shows that many residents essentially began imposing a lockdown on themselves before their government did. For example, the electricity usage indicates that people became homebodies well before they were required to do so. Similarly, the NBER working paper written by Felipe L. Rojas and others writes:

most of the economic disruption was driven by the health shock itself. Put differently, it appears that the labor market slowdown was due primarily to a nationwide response to evolving epidemiological conditions and that individual state policies and own epidemiologic situations have had a comparatively modest effect.

Many employers sent their employees home long before any official measures. Many workers reduced their labor supply, while many consumers reduced their shopping activity long before any national or state restrictions. Americans and other nations did not need their governments to tell them to stay home, they all saw what was happening in Italy. People are not stupid, and they are not like sheep who meekly await the orders of their governmental shepherd. So as Jonathan Key noticed in his excellent Quillette story:

much of the lockdown effect was imposed not by top-down fiat, but through millions of small decisions made every day by civic groups, employers, unions, trade associations, school boards and, most importantly, ordinary people.

OK, but why are we writing about this? Well, just as many people blame the governments for the economic shutdown, they also hope that the end of the Great Lockdown will quickly revive economic growth. Unfortunately, these hopes are unfounded. The government decrees do not work as a sort of magic wand that first knocked the economy to its knees but now it will bring it to life.

What does it mean? There will be no V-shaped recovery. Just deal with it. People are afraid – rightly or not – of the new coronavirus. Yes, the mortality rate is not high, but it is several times higher than in case of influenza. And even if it kills only a small percentage of infected people, it can cause serious long-term health complications such as lung scarring, heart damage, lower testosterone level in men, and neurological and mental health effects.

So, it should not be surprising that customers won’t rush to shopping malls, cinemas and restaurants after the Great Unlock. The uncertainty and fear will remain for some time, perhaps even until the arrival of an effective treatment or a vaccine. As a consequence, many shops and restaurants will not reopen after the strict shutdown ends. As a reminder, the restaurant industry itself accounts for about 16 million US jobs.

And some changes in the labor market will also have permanent effects. As Victoria Gregory and others in another NBER working paper show, the pandemic will “have long-lasting negative effects on unemployment. This is so because the lockdown disproportionately disrupts the employment of workers who need years to find stable jobs.” The conclusion is clear: the economy will not quickly return to the pre-pandemic state and trajectory.

What does it mean for the gold market? The lack of V-shaped recovery is good news for gold. The persistent uncertainty and fear should support the safe-haven demand for gold. The weaker than expected recovery will cause the Fed and Treasury to maintain their dovish monetary and fiscal policies, which should also be positive for the yellow metal. To be clear, we do not claim that gold prices will necessarily rally like crazy. Rather, we argue that the Great Unlock does not have to be very negative for the yellow prices, because it will not be a reverse of the Great Lockdown, and the return to normalcy will be only gradual.

Chart 1: Gold prices (London P.M. Fix) from January 2 to June 1, 2020

Indeed, as the chart above shows, the easing of government regulations did not send gold prices down. Actually, gold moved further north in May. And the fundamental outlook for gold – which includes low real interest rates, elevated uncertainty, dovish Fed and mammoth fiscal deficits – should remain positive.

If you enjoyed the above analysis and would you like to know more about the links between the coronavirus crisis and the gold market, we invite you to read the June Market Overview report. If you’re interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits – Effective Investments Through Diligence and Care

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Trading Alerts.

 

When People Riot, Should We Call Military or Gold?

Could 2020 end, please? The pandemic is not over and the US suffers now from mass riots across the country. They could aggravate the coronavirus crisis and increase the demand for gold.

On May 26, a black man, George Floyd, was killed by the police in Minneapolis, Minnesota. During his arrest – he allegedly used earlier a $20 counterfeit bill in a nearby store – the police officer put a knee on Floyd’s neck on the ground, although the arrestee was not aggressive and repeated several times that he could not breathe.

All the police officers involved in the arrest were fired the next day, but arrested only on Friday. The arresting police officer who strangled Floyd was charged with murder and manslaughter. But it was not enough for many people. Outraged by the police’s brutality resulting in Floyd’s death and lack of quicker arrest of the police officers, hundreds of protesters poured into the streets across the country, including New York, Washington DC and Los Angeles.

Initially, protests were peaceful but later they have escalated as police have clashed with demonstrators and many shops have been looted. More than 5,000 people were arrested since the beginning of the protests on June 2.

Indeed, the situation has become serious. On Friday night, the riots triggered the highest alert on the White House complex since the September 11 attacks, and Secret Service agents rushed President Trump to the White House bunker as protesters gathered outside, some of them throwing rocks. Twenty-three states have called in the National Guard to quell unrest, and Trump threatened on Monday to mobilize the military across the US.

Implications for Gold

What do the riots across the US imply for the country and the gold market? Well, the civil unrest should be positive for the yellow metal. There are three reasons for this. The first and most obvious is that geopolitical risks concerning the US directly could spur the safe-haven demand for gold. We are, of course, fully aware that geopolitical factors rather do not drive the long-term trend in the gold prices, but they help in the short-term. As the chart below shows, the yellow metal has been consolidating recently around $1,700, perhaps preparing for further upward move.

Second, the mass protests during the pandemic is, um, well, not something what epidemiologists dream of. You don’t have to be a scientist to deduce that big demonstrations and large gatherings – and many protesters do not even wear masks – could accelerate the viral spread and increase the chances of the second wave of infections, or at least, hamper the deceleration of the epidemic. The longer and more severe the epidemic, the better for gold.

Importantly, although the direct reason behind the protest was police brutality against black community, the long period of social distancing and economic lockdown, spurring high unemployment, aggravated the civil unrest. We warned in late April, that we could see the premature reopening of the economies or even the riots. Now, we have both. Bad combination from the health and economic point of views, but quite supportive for the gold market.

Third, the civil unrest could also slow the economic recovery from the COVID-19 pandemic. The violent protests and looting destroyed some stores, buildings and cars, subtracting from the GDP. Many people already reduced their economic activity due to the COVID-19 outbreak – the new civil protests can add a new layer of uncertainty and subdued consumer spending and business investment. Hence, although not a game-changer, at least not yet, the riots could support the gold prices, especially if they contribute to the current depreciation of the US dollar.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Will the Fed Trigger Inflation This Time, Boosting Gold?

During Great Recession, many people feared that the Fed’s quantitative easing would trigger high inflation, or even hyperinflation. As we know, it didn’t happen. Why? Well, the main reason is that the Fed created money – that’s true – but in the form of bank reserves. And this is a very specific medium of exchange that does not enter the real economy like cash, but stays within the interbank market. You see, bank reserves are a special kind of money used only between commercial banks and central bank and between commercial banks themselves. So, larger supply of reserves does not therefore automatically translate into higher prices.

This can happen only if these additional reserves motivate commercial banks to expand their lending. Investors should remember that in the contemporary banking model based on the fractional reserve banking, the bank deposits account for the majority of the money supply. And when the bank deposits are created? They are created whenever banks grant loans.

As the chart below shows, the growth rate of credit supply was falling during Great Recession, reaching even negative values for some time. Why? For two reasons. First, American households have deleveraged, i.e., they decided to pay back the debts they had, so they were not interested in taking new loans. Second, as the name suggests, the global financial crisis was, well, financial crisis to a large extent. It means that banks were severely hit and they were left with a lot of toxic assets. So, banks themselves were not interested in granting new loans, rather they cleaned their balance sheets. Please also remember that the supervisors tightened the bank capital requirements in the aftermath of the Lehman Brothers’ collapse.

Chart 1: US bank credit (annual % change) from January 2007 to December 2010.

However, this crisis is different. The Fed and other central banks did not only introduce quantitative easing, but they also implemented other programs which can turn out to be more inflationary. For example, the US central bank will lend, under the Term Asset-Backed Securities Loan Facility, to holders of certain AAA-rated securities backed by newly and recently originated consumer and small business loans. Moreover, the new Main Street Lending Program set by the Fed in April works like this: commercial banks grant loans to small and medium companies employing up to 10,000 workers or with revenues of less than $2.5 billion, and then they retain 5 percent of the loan on their balance sheets but sell the remaining 95 percent of the loans to the Main Street facility created by the Fed.

All these programs aim to support the flow of credit to employers, consumers, and businesses, encouraging commercial banks to grant new loans to companies that have suffered as a result of the economic lockdown. Moreover, the financial sector has not been hit initially by the coronavirus crisis, while the supervisors eased reserve and capital requirements for banks. The demand for loans from entrepreneurs is also vivid. All this means that the pace of growth of credit and money supply may be higher than during the Great Recession. Indeed, as the chart below shows, they accelerated in March and April.

Chart 2: The annual % change of the US bank credit (green line) and M2 money supply (red line) from January 2019 to April 2020.

 

Summing up, the unconventional monetary policy implemented in the aftermath of the Great Recession did not spur inflation. However, this time may be different. To be clear, we are not saying that we will see hyperinflation in the US. That’s still very unlikely. What we mean is that the commercial banks are – so far – significantly more eager to grant new loans. So, the resulting increase in money supply should create higher inflation after some time, if other factors remain unchanged.

In other words, this crisis is more likely to result in stagflation than the Great Recession, especially as economy faces disruptions in the supply chains. Indeed, please take a look at inflation expectations derived from the 5-year inflation-adjusted Treasuries displayed in the chart below – as you can see, the market does not expect deflation now, as it did in the aftermath of the previous economic crisis.

Chart 3: US 5-year breakeven inflation rate from January 2007 to April 2020

Given that gold is considered to be an inflation hedge, the higher odds of inflation are fundamentally positive for the gold prices. It does not mean that disinflation or deflation would be negative for the yellow metal, as it could shine nevertheless during the crisis of any kind, but increased chances for stagflation should be an additional factor that could encourage more investors to buy gold.

Thank you for reading today’s free analysis. We hope you enjoyed it. If so, we would like to invite you to sign up for our free gold newsletter. Once you sign up, you’ll also get 7-day no-obligation trial of all our premium gold services, including our Gold & Silver Trading Alerts. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Is the Worst Behind Us and Gold Has to Plunge Now?

A lot happened over the last few days. Let’s start with the analysis of fresh economic data. First, the initial jobless claims came in at 2.4 million in the week from May 9 to May 16, as the chart below shows. While the number of Americans who applied for the unemployment benefit have declined for seven straight weeks following the peak of 6.9 million in late March, it is still a mammoth figure, much higher than before the pandemic (when about 200,000 people used to apply for the unemployment benefit each week).

It means that the devastation in the US labor market has been unprecedented. As the chart below shows, almost 39 million of people claimed benefits since the beginning of the epidemic, which implies that the unemployment rate is comparable now to the rate seen during the Great Depression, or even higher! Importantly, the trend of total claims since March 21, 2020, is still rising strongly, which means that the recovery is so far weak, despite the partial reopening of the economy.

Second, the Chicago Fed’s national activity index, which measures whether the economy expands above or below the average growth, declined from a negative 4.97 in March to a negative 16.74 in April. The number is the worst in the data series history which begins in 1967, easily surpassing the disaster of the Great Recession, as the chart below shows.

However, situation has improved somewhat in May, at least according to regional manufacturing surveys. For example, the Philadelphia Fed Manufacturing Index rose from -56.6 in April to -43.1 this month. The reading is still terrible, but less so than one month ago. Similarly, the New York Empire State Index rebounded from -78.2 in April to -48.5 in May.

The latest PMI data from the IHS Markit also show some improvement. The flash manufacturing purchasing managers index rose from 36.1 in April to 39.8 in May, while the flash services purchasing managers index increased from 26.7 to 36.9. It means that the worst is probably behind us.

Implications for Gold

What does the recent bunch of data imply for the US economy and the gold market? Well, it seems that the rate of economic collapse has peaked in April. This is probably why the stock market rallied this week, with S&P 500 reaching the psychologically important level of 3,000. People become more optimistic with the number of infections of the coronavirus under control and relaxed containment measures. And a further planned easing will help the economy further, but demand could remain weak with some restrictions and social distancing remaining in place. In other words, the US economy should rebound later this year, but is not out of the woods yet – so the pace of recovery may be slower than the most optimistic investors hope for.

In other words, the stock market may be priced for an economic recovery that the data so far does not support. The initial crash was an overreaction, so now investors look for sparkles of hope everywhere. For sure, there are many reasons for being optimistic, but the war with coronavirus is not over. So, there might be some correction in price as investors could go into risky assets, but gold still seem to be a rational addition to the portfolio. Given that second-order effects (think about the consequences of high debt, geopolitical repercussions, or the possibility of corporate bankruptcies, etc.) have not been probably fully priced in yet, and that it’s very difficult to predict them, the significant portion of the safe-haven demand for gold should remain in place.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

 

Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally?

Last week, the FOMC released the minutes from its last meeting. What implications do they carry for the gold market?

FOMC Finally Acknowledges the Situation As Serious

Last week, the FOMC has published minutes of its meeting from April 28-29. They show that the Fed reassessed the coronavirus economic implications since the previous meeting at which the central banks did not yet grasp the full gravity of the situation. This time, they acknowledged that “the second quarter would likely see overall economic activity decline at an unprecedented rate.” Indeed, as we reported many times, the GDP will collapse, while the unemployment rate will soar to the levels not seen since the Great Depression.

And what’s next? The Fed’s baseline scenario is that economic growth will rise appreciably and the unemployment rate will decline considerably in the second half of the year, although a complete recovery was not expected by year-end. So, forget about the V-shaped recovery, even in the baseline scenario!

But the US central bank prepared also a more pessimistic projection which is “no less plausible than the baseline forecast.” In this scenario, there would be further economic disruptions, which could lead to a protracted period of severely reduced economic activity:

a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year. Compared with the baseline, the disruption to economic activity was more severe and protracted in this scenario, with real GDP and inflation lower and the unemployment rate higher by the end of the medium-term projection.

The FOMC members noted several downside risks. The first is, of course, a negative evolution of the coronavirus outbreak and related uncertainty. Actually, the mere possibility of secondary outbreaks of the epidemic may cause “businesses for some time to be reluctant to engage in new projects, rehire workers, or make new capital expenditures.” This is very important as investments are the real engine of economic growth. Unfortunately, the real business fixed investment slumped in the first quarter and they are expected to drop even further in the second quarter amid social distancing restrictions, declines in crude oil prices and elevated level of uncertainty. Thus, the future pace of economic growth might be sluggish.

The second major risk is, what we also warned about, that “even after government-imposed social-distancing restrictions come to an end, consumer spending in these categories would likely not return quickly to more normal levels.” Some people even say that the behavioral changes could persist until the wide distribution of the vaccine. It doesn’t require much imagination to predict that many companies will go bankrupt. For example, even before the pandemic, many restaurants had tiny profit margins. With only half of tables occupied, such enterprises will not survive. Not to mention airlines or travel companies. So, even the central banks figured out that “even after social-distancing requirements were eased, some business models may no longer be economically viable, which could occur, for example, if consumers voluntarily continued to avoid participating in particular forms of economic activity.”

Third, some workers who lost job will not get it back quickly, as they may experience a loss of skills or even become discouraged and exit the labor force. As we wrote earlier, it is very easy to lose job or become broke, but it takes more time and effort to get a new job – especially if generous unemployment benefits do not encourage to take quick actions – or to set up a new business, especially when one is confronted with the sea of uncertainty.

Fourth, “higher levels of government indebtedness, which would be exacerbated by fiscal expenditures that were necessary to combat the economic effects of the pandemic, could put downward pressure on growth in aggregate potential output.” Bravo, Fed, you finally realized that debt only borrows the economic growth from the future!

Fifth, there are significant risks to financial stability. A number of the FOMC members were concerned that banks and corporations could come under greater stress, if adverse scenarios for the spread of the pandemic and economic activity were realized. The high level of corporate debt and low energy prices exacerbates these risks.

Implications for Gold

The FOMC minutes reaffirms recent Powell’s interviews, speeches and testimonies that prepare investors for an unprecedented disaster in the second quarter and subdued economic activity later this year with significant downside risks. As Powell’s remarks were generally positive for the gold prices, the minutes should continue to be supportive for the yellow metal too, although the main message has been already known by investors.

However, the minutes show also two new things. First, they indicate that the FOMC members want to be more transparent regarding the future trajectory of interest rates. So, at the upcoming meeting, we could see important changes in the Fed’s forward guidance: “While participants agreed that the current stance of monetary policy remained appropriate, they noted that the Committee could, at upcoming meetings, further clarify its intentions with respect to its future monetary policy decisions.” Given the epidemiological – we are all epidemiologist now! – and economic situation, we expect dovish moves, which should be positive for gold prices.

Second, the minutes show the increasing support for the yield-curve control:

Several participants remarked that a program of ongoing Treasury securities purchases could be used in the future to keep longer-term yields low. A few participants also noted that the balance sheet could be used to reinforce the Committee’s forward guidance regarding the path of the federal funds rate through Federal Reserve purchases of Treasury securities on a scale necessary to keep Treasury yields at short- to medium-term maturities capped at specified levels for a period of time.

As the chart below shows, the real interest rates are already below zero. If the Fed decides to cap the bond yields, they will remain at ultra-low levels.

Chart 1: Real interest rates (red line, left axis, US 10-year inflation-indexed Treasury yields) and the price of gold (yellow line, right axis, London P.M. Fix)

The elimination of the upward pressure on the interest rates would be positive for the gold prices. Gold is a non-interest bearing assets, so it benefits from low real interest rates, in particular from negative interest rates.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. In order to enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.