US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally?

US Epidemiological Situation Is Grim

Just as people were overly optimistic before the stock market top, they can be too pessimistic right now. This is a real risk and we take it into account. However, the incoming data confirm our view expressed in the April edition of the Gold Market Overview that “the US will be severely hit” and that “the worst is yet ahead for the States”.

Unfortunately, it turned out that we were right. On Monday, COVID-19 was the third leading cause of death in the United States. So much for the claims that influenza is worse than coronavirus. The U.S. coronavirus-related deaths reached more than 4,000 deaths, which is behind only Italy and Spain! The US death toll has actually surpassed the number of deaths in China (much more populous country), as you can see in the chart below.

Chart 1: Total confirmed deaths due to COVID-19 in China (blue line) and the US (red line) by April 1, 2020.

However, the sad truth is that the epidemiological curve in the United States is very steep, steeper than in Italy, as you can see in the chart below. It is so steep that the number of cases and deaths will be still increasing, and they will rise quite rapidly, actually. Well, we warned our Readers that this is how the exponential growth works. According to the chart below, the number of cases will double each 2-3 days.

Chart 2: Total confirmed cases of COVID-19 and other countries since the 100th confirmed case.

To make matter worse, it’s actually too late to avoid disaster, according to Dr. Michael T. Osterholm, the infectious-disease expert. This is because the United States lacks a unified national strategy, as counting on widespread testing in the United States is doomed to fail, partially because there will be soon a major shortage of chemical reagents for coronavirus testing. Moreover, there will be shortages of personal protective equipment and medical equipment such as respirators.

However, the scariest thing about the epidemic in the United States is that we are observing an increased number of severe illnesses and deaths in people between the ages of 25 and 50. The reason is, just as we warned in one of our previous Fundamental Gold Reports, that many Americans are obese or have cardiovascular disease. We wrote:

But the problem is there are many people with health issues. A great percentage of Americans are obese – which worsens their situation. All this means that it’s probable that pandemic will not be a short-term issue we quickly deal with, but it will stay with us for months

Indeed, the epidemiological prospects for the US are grim. Even the White House expects now up to 240,000 deaths. But even this high a number might be a big underestimate of the total death toll, especially if the health system becomes overburdened. If you multiply the half of the US population with 1 percent mortality rate ,you will get more than 1.6 million – and when the healthcare system collapses, the mortality rate increases to about 5 percent… Do the math on your own!

Implications for Gold

What does it all mean for the US economy and the gold market? Well, we are afraid that all people who oppose the social distancing measures and downplay the threat of the coronavirus still do not grasp the gravity of the situation. So, let’s reiterate: this time is different. We struggle with real epidemic – luckily not as bad as Spanish flu, but still fatal.

The social distancing measures will not end soon. Don’t count on this. For example, Saudi Arabia hinted that it is likely to suspend the annual pilgrimage to Mecca set for late July. Yup, we will not go out from quarantine for a while… Just take a look at China – President Xi Jinping said yesterday that it was too early to suspend all restrictions. Yes, smart scientists will develop the vaccine one day, but it will not be ready until 2021. One thing is to develop vaccine, but another is to make it working and safe.

So, don’t count on quick V-shaped recovery. Rather, brace yourself for economic winter. The latest jobless claims were huge – but the numbers are likely to accelerate to the downside still. Markets are only starting to figure out what is really happening and that the monetary and fiscal stimuli will not prevent the crisis.

So, it’s probable that the stock market has not yet discounted all the economic damage. And, the longer the shutdown lasts (and in the US the epidemic was not contained early on, so it will last longer), the higher the risk of a negative feedback loop on the financial markets and the financial crisis.

So, it all means that the US stock market may fall further, dragging gold along. But when the sell-off is done, gold should rally in response to the recession, quantitative easing, spike in fiscal deficit, negative real interest rates, and all the economic madness we are likely to see in the upcoming days.

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 – 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.

Huge Unemployment Is Coming. Will It Push Gold Prices Up?

One of the Most Scariest Things You Will See This Week

Would you like to see something scary? I guess not, but I’ll show you anyway! But don’t worry: it will not be an microscope image of the coronavirus! Instead, I will present you a chart, a really scary chart… Ready to take a look?

Chart 1: US Initial Jobless Claims from January 7, 1967 to March 21, 20120

The chart above shows the number of US initial jobless claims. As you can see, the number of Americans who applied for unemployment benefits last week shot up to the moon!

The initial jobless claims rocketed from 282,000 on March 15 to 3.28 million a week later! Yup, you read it correctly, to almost 3.3 million in just seven days! It means a rise of more than 3 million, or more than a tenfold increase, the highest in the history of this indicator!

Because the spike is so steep that the long-term chart may be not easily readable, we insert below the initial jobless claims over the last year. Still scary, huh?

Chart 2: US Initial Jobless Claims from March 23, 2019 to March 21, 20120

And do you know what is really frightening? The sudden surge in claims is likely just the beginning… You see, the data reported by the U.S. Department of Labor are released on Thursday, but they describe the situation from preceding Saturday. It means that when you read these words, the number of application for unemployment benefits has increased further along with the fresh waves of layoffs due to the social distancing and closure of nonessential businesses.

So, brace yourself for the surge in the unemployment rate in March and April! When we add all these new claims to the currently unemployed people (and assuming unchanged participation rate), the unemployment rate increases from 3.5 to 5.5 percent. But as we added just jobless claims from one week, you can expect the unemployment rate to rise quickly towards 10 percent, a Great Recession level, or even towards 20 percent, a level more associated with the Great Depression.

Indeed, the current shock to the global economy will likely be faster and more severe that the 2008 financial crisis or even the Great Depression. In those two previous episodes, stock markets also collapsed, credit markets froze up, massive bankruptcies followed, unemployment rates soared, while GDP contracted – but at a slower pace! All these took around a few years, not a few weeks, to play out!

Just take a look once again at Chart 1! As you can see, the number of initial jobless claims increased steadily from 344,000 in December 2007 to the peak of 665,000 in March 2009. So, it less than doubled over more than a year, while now it increased tenfold in one week! The pace and depth of the current shock is really unprecedented!

But it makes sense: even during the worst times of the economic crisis of 2008, the unemployment rate did not surpass 10 percent. It means that most of the labor force had jobs and worked more less as usual. The financial institutions were badly hit, which affected also households and the real economy, but the latter was not frozen. Now, the bulk of economic activity literally shut down. It did not happen even during the greatest recessions or during world wars when the production did not stop, but shifted towards military needs…

Implications for Gold

What does it all for the gold market? Well, given the scale of the current crisis and the monetary and fiscal stimulus to cushion the US economy, gold prices should go up. If not now, then when?

Even the Goldman Sachs believes that it is time to buy bullion. The Goldman team led by Jeffrey Currie wrote:

We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policy makers act to accommodate shocks such as the one being experienced now.

Indeed, the price of gold has increased last week, as the chart below shows. However, gold’s performance is hardly an impressive bullish reaction to the COVID-19 crisis. But, as we explained before, this was caused by the massive sell-offs of panicked stock market investors who desperately needed cash. The current crisis has so far been deflationary – the oil prices plunged – and positive for the US dollar, which also created downward pressure on the gold prices.

Chart 3: Gold prices from January 2, to March 26, 2020.

But this can change soon. To be clear, gold prices may fall further on the way, as people during liquidity crises sell everything they can to obtain cash needed to run their companies or households. But fundamentals (negative real interest rates, risk aversion, rising public debt, unconventional easy monetary policy, etc.) should triumph eventually other factors and push gold prices up.

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 – 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.

Pandemics and Gold: Part 2

We invite you thus to read our today’s article, which provides an important analysis of the history of pandemics and their effects on the gold market. Read it and learn what investment conclusions for the current epidemic we can draw.

In the first part, we analyzed the HIV/AIDS pandemic, as the most deadly pandemic since the 1971, and the SARS pandemic, as the most similar to the current COVID-19 pandemic. However, we have witnessed several other pandemics in the recent decades. Let’s investigate them now and draw conclusions for the global economy and the gold market.

Let’s start with the epidemic of 2009 A/H1N1 flu, called also the swine flu. It originated in pigs from central Mexico and lasted from early 2009 to late 2010. It was highly contagious, as around 1.66 billion of people, or 24 percent of the then global population, contracted the illness. Luckily, the case-fatality rate was very small, around 0.001-0.0035 percent, which resulted in an estimated range of deaths from between 151,700 and 575,400 people, around 10 times higher than the first estimates based on the number of cases confirmed by lab tests.

The peak of interest in the swine flu occurred in April 2009, while the number of cases peaked in June 2009. As one can see in the chart below, the price of gold did not rally to the hysteria about the swine flu. It is true that gold started in mid-2009 its great bull market, but the rally came after the peak in the swine flu outbreak, so it seems that it was rather a reaction to the Great Recession and the Fed’s quantitative easing.

Chart 1: Gold prices during swine flu pandemic (London P.M. Fix, in $).

The next pandemic originated in 2012 in the Middle East, so it was named Middle East Respiratory Syndrome (MERS). Just like the COVID-19 and SARS, the MERS was caused by the virus from the coronavirus group. It was likely transmitted to humans through camels and was much more dangerous than the swine flu, as its fatality rate was 34 percent.

However, only 2,506 cases and 862 deaths were reported from 2012 to January 15, 2020. The peak of infection and the peak of interest occurred in April – May 2014. As the chart below shows, gold prices actually declined during the peak of MERS pandemic, which was probably caused by the limited geographical scope – the majority of cases were reported from Saudi Arabia and other countries in the Eastern Mediterranean.

Chart 2: Gold prices during MERS pandemic (London P.M. Fix, in $).

Another recent pandemic was the West African Ebola virus. It originated in December 2013 in Guinea and lasted until 2016. According to the official data, there were a total of 28,646 suspected, probable and confirmed cases and 11,323 deaths (case-fatality rate of 39.5 percent), but the WHO suspects that the true number may be higher.

The interest in Ebola virus started to rally in summer 2014 and remained elevated through the whole year, with the culmination in October. But as the chart below shows, gold prices decreased in that period. The probable reason of the gold’s bearish reaction is the fact that the pandemic was contained to, as the name suggests, West Africa (mainly in Guinea, Liberia, and Sierra Leone), which is neither the major financial center nor the industrial center, like China is.

Chart 3: Gold prices during Ebola pandemic (London P.M. Fix, in $).

The next pandemic was the Zika fever caused by Zika virus in Brazil that started in March 2015. In November 2016, the WHO announced that Zika is no longer a public health emergency of international concern. It was estimated that 1.5 million people were infected by Zika in Brazil, with over 3,500 cases of microcephaly reported between October 2015 and January 2016. The interest in Zika virus started to rally in January 2016 and remained elevated through the whole year, with peaks in February and then again albeit lower in August.

The price of gold also started to rally in January 2016, as the chart below shows. However, it’s rather a coincidence as the more detailed analysis does not show the positive correlation between the gold prices and the interest in the Zika virus. For example, the latter plunged in March, but gold prices did not – there was a correction, but not a plunge.

And despite the downward trend in the number of cases and the interest in the Zika virus, the price of gold generally was going upwards until September hawkish FOMC meeting. Gold’s performance was driven more by the macroeconomic evens such as the introduction of the NIRP by the Bank of Japan in January 2016.

Chart 4: Gold prices during Zika pandemic (London P.M. Fix, in $).

Summing up, gold does not always react positively to pandemics. In some cases (MERS and Ebola), the price of the yellow metal even declined! It confirms our view that in the long-run, geopolitical drivers and all sorts of natural disasters are less important to the gold market than macroeconomic or fundamental factors.

Gold is especially unmoved when the epidemic is geographically contained and it does not affect significantly the developed countries and the world’s economy. As we often repeat, geopolitical events move the gold market the most significantly when they affect directly the US or the global economy.

Thus, our historical analysis implies that the current outbreak of COVID-19 does not have to provide a sustained rally in the gold prices. Of course, this time may be different. This is because the new coronavirus originated in China, which is now an important part of the global economy and a major industrial center strongly linked through the supply chains with the US and European companies.

But investors should not give in to fear – although in previous pandemics the stock market always plunged initially, it quickly gave way to a recovery and significant gains. It implies that the recent shift towards the safe-havens assets such as gold may reverse later in the future… unless the Fed chickens out and eases its monetary policy, which – given the recent spread of the coronavirus to the Europe and the US – has become more likely.

If you enjoyed the above analysis and would you like to know more about the links between the coronavirus epidemic and the gold market, we invite you to read the March 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!

Thank you.

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.

Pandemics and Gold: Part 1

The outbreak of COVID-19 has brutally reminded people of the risk of a pandemic. However, investors should never panic but look to history as a guide. We invite you thus to read our today’s article, which provides an important analysis of the history of pandemics and their effects on the gold market. Read it and learn what investment conclusions for the current epidemic we can draw.

Although present in popular culture, the outbreak of COVID-19 has brutally reminded people of the risk of a pandemic. Some people panic unnecessarily, but their fear is understandable – after all, epidemics and pandemics (which are global epidemics) have accompanied humanity since the dawn of time, taking a serious toll. For example, the best known and the most devastating pandemic in human history, was the medieval Black Death that killed 75-200 million people, reducing the Europe’s population by 30 to 60 percent.

But are the fears about the new coronavirus justified? Must gold prices rally? Let’s investigate the history of pandemics and draw conclusions for the current case, focusing – obviously – on the gold market. Investors should never panic but look to history as a guide. Although very interesting, we omit all the pandemics before the 1971, when the gold standard was abandoned and the yellow metal started to be traded freely. We also do not analyze numerous influenza epidemics, as they occur generally each year during the winter and impact primarily the elderly (majority of influenza-associated deaths are in persons over 64 years, whose immunity is weakened). We will analyze the pandemics visible in the table below, in this part focusing on the first two.

Table 1: History of global pandemics (source: own elaboration based on data from the World Health Organization and https://www.ncbi.nlm.nih.gov/books/NBK525302/)

History of Global Pandemics

So, we start our overview with the HIV/AIDS pandemic, which originated in Africa in the 1920s. However, AIDS was not recognized until 1981, while HIV was not discovered and related to AIDS until 1983. In the 1980s and early 1990s, the outbreak of HIV/AIDS swept across the United States and rest of the world. Although the number of new infections peaked in 1999-2000 at 3.16 million people infected that year, it has not still been eliminated. Actually, it is one of the world’s most fatal infectious diseases, particularly across Sub-Saharan Africa. As of 2017, almost 36 million people are infected with HIV globally, and almost one million (954,000) people died from HIV/AIDS in that year.

However, the gold prices did not rally in a response to the HIV/AIDS pandemic. The chart below displays the period of 1996-2001, when the number of new infections were above 3 million per year, with the peak of 3.16 million in 1999-2000. As one can see, gold remained in the bear market with only one significant rally, but related not to the HIV/AIDS pandemic, but to the Washington Agreement.

Chart 1: Gold prices during HIV/AIDS pandemic (London P.M. Fix, in $).

Why the financial markets do not panic because of HIV/AIDS? Well, the first reason is that HIV is spread not by droplet transmission, but primarily by unprotected sex and infected needles, so it does not spread as fast as the coronavirus and it is relatively easy to avoid the infection. Second, HIV does not kill right away, which makes it less frightening. Third, it is a well-known danger, while the new coronavirus is, well, new, which makes it look more dangerous. Fourth, the pandemic has been contained in the West, affecting mostly Sub-Saharan Africa right now. Whatever we think about it, global financial markets, including the precious metals market, react to geopolitical and health dangers only when they threaten economic centers of the world.

The second pandemic was the severe acute respiratory syndrome (SARS) which was caused by the SARS coronavirus traced to the bats. The pandemic started in Guangdong Province, China, in November 2002 and ended only seven months later in June 2003, peaking epidemiologically in March 2003. According to the World Health Organization, the incidence was 8096 cases with 774 deaths, resulting in a case-fatality rate of 9.6 percent.

As the chart below shows, the price of gold has increased during the SARS pandemic. However, the peak of the outbreak was between February and May 2003 – and in this period, the price of the yellow metal declined. In other words, gold peaked in February 2003, and then declined until April despite the pandemic being still in full force.

Chart 2: Gold prices during SARS flu pandemic (London P.M. Fix, in $).

Another issue is that gold was already in the bullish trend. So although the SARS pandemic certainly did not hit gold, it seems that the yellow metal was more driven by the fundamental factors, such as the loose monetary policy after the burst of the dot-com bubble and the 9/11 attacks rather than by the SARS-related fears. The pandemic also coincided with the US invasion of Iraq and a bear market in the greenback.

Because COVID-19 is caused by the virus belonging to the same group of viruses as SARS coronavirus, and it also originated in China, it seems natural to compare the situation back then to now. Good news is that the COVID-19 is less deadly than SARS, as its case-fatality rate is 3.3 percent, compared to 9.6 percent of SARS. However, it is important to remember that the biggest economic costs of pandemics come not from mortality, but from people’s efforts to avoid infection.

Bad news is that the new coronavirus spreads faster than SARS, as the latter led to a total of almost 8,100 cases over the course of 8 months, while the number of COVID-19 cases surpassed 80,000 in just two months.

Another key difference is that China’s economy has become a more important component of the global economy and more intertwined with it. Given the trade wars and its much higher debt, it is also more vulnerable in certain dimensions than it was during the SARS outbreak (although it has more resources to contain the pandemic). Hence, the impact of COVID-19 pandemic on the global economy and, thus, the gold market might be higher than in case of HIV/AIDS or SARS outbreaks, especially that it broke out during the global slowdown and the beginning of the gold’s bull market.

If you enjoyed the above analysis and would you like to know more about the links between the coronavirus epidemic and the gold market, we invite you to read the March 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!

Thank you.

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.

 

Global Pandemic Is On and Stock Bears Roar. Will Gold Make a Move?

It’s a Global Pandemic Now

We are now officially in the pandemic stage! Although I have long written about the COVID-19 as a pandemic, not an epidemic, the WHO has finally admitted that situation is much worse. As WHO Director-General, Dr. Tedros Adhanom Ghebreyesus said yesterday:

WHO has been assessing this outbreak around the clock and we are deeply concerned both by the alarming levels of spread and severity, and by the alarming levels of inaction. We have therefore made the assessment that COVID-19 can be characterized as a pandemic. 

It is the first pandemic sparked by a coronavirus. Surely, SARS and MERS were also of international character, but COVID-19 has spread wider. As of today’s morning, the new coronavirus cases were reported in 118 countries. More than 124,000 people were infected, and 4,607 died. The situation is indeed serious. And, as you can see on this very informative website, the numbers are growing. But the geographical is not the only difference between an epidemic and a pandemic – another is that “we have never before seen a pandemic that can be controlled”. Wow, Dr. Ghebreyesus can lift the spirit, can’t he?

Not surprisingly, the stock markets did not welcome the move. The S&P 500 fell almost 5 percent yesterday. And, as the chart below shows, the index has already fell below 2,800 points, or 20 percent below its intraday record high from February 19, crossing the threshold for a bear market. Similarly, the Dow Jones Industrial Average also plunged 20 percent below its intraday record high reached on February 12, or below 24,000 points, confirming that the US stock market has entered the bear market for the first time since the Great Recession.

Chart 1: S&P 500 (green line, left axis) and Dow Jones (red line, right axis) from January 2 to March 11, 2020.

Recession: Not If, but How Deep.

As the spectre of COVID-19 is haunting the globe, the analysts, economists and investors are shifting the conversation from whether there will be a recession in 2020, to the debate how severe the contraction will be and what shape the recovery will take. Yes, the epidemic in China is on the decline and the country is returning to its normal economic potential.

However, as the novel coronavirus spreads across the globe, more governments take drastic steps to limit its reach, which will negatively affect the supply chains and economic activity. For example, yesterday Italy added new restrictions to the lockdown, closing all shops except supermarkets, food stores and chemists. The negative effects of such shutdowns are going to linger, making a quick, V-shaped recovery less likely. The more prolonged the recession, the better for gold.

To support the badly hit economies, the governments and central banks are pumping money into economy. The New York Fed increased the maximum offering of its daily operations in the market for repurchase agreements, or repo, to $175 billion.

Meanwhile, Britain and Italy have already announced multi-billion-dollar programs to fight the COVID-19. The UK government has announced 30 billion pounds of fiscal stimulus and pledged 600 billion pounds by 2025 for infrastructure. And the Bank of England, following the Fed and the Bank of Canada, cut its interest rates by 50 basis points, from 0.75 to 0.25 percent.

It remains to me a mystery how the rate cut is supposed to help if at the same time, people are encouraged to stay at home and, what goes with it, limit their economic activity. Which companies are supposed to cheer the lowered interest rates in times of reduced consumer demand and disrupted supply chains?

Let’s repeat: as the easy monetary policy did not manage to revive the economy after the Great Recession, it will neither help now, especially that coronavirus impacts the economy mainly through the changed human behavior – and the central bank actions will not alter them. It is good news for the gold market.

Some investors can complain that gold should rally higher given the current turmoil. It’s true that the somewhat limited reaction seems to be disappointing. But people should remember two things: first, gold’s relative performance versus other assets (think about equities or oil) is actually great; second, there are many margin calls on the marketplace right now and some panicked investors sell gold in order to raise much needed cash, just as we saw in the immediate response to the financial crisis – gold initially fell, only to rally later.

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 – 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 Peeks Above $1,700 amid Coronavirus Fears and Market Turmoil

On Sunday, Italy registered a huge jump in new cases of the COVID-19, the stock market plunged, while the oil market crashed. Tuesday morning, and Italy is on lockdown. Meanwhile, gold jumped above $1,700. What’s next for the yellow metal?

Gold Jumps Above $1,700

Last week, I wrote that:

from the fundamental point of view, the environment of fear, ultra low interest rates, weak equity markets and elevated stock market volatility should be positive for the yellow metal (…) the good news is that the markets expect further Fed’s interest rate cuts on the way – it lays the foundation for future gains in the gold market.

And indeed, we did not have to wait long for more gains. On Sunday, gold jumped briefly above $1,700, reaching another psychologically important level, as the chart below shows. The yellow metal made it to this price point for the first time since late 2012.

Chart 1: Gold future prices from March 3 to March 9, 2020.

C:\Users\arkadiusz.sieron\Desktop\GOLD\FUNDAMENTAL GOLD REPORT\stooq gold march 9.png

Yes, you guessed, gold went further north amid the growing spread of the COVID-19. Data reported to the World Health Organization by March 8 shows 105,586 confirmed cases in the world, of which 24,427 originated outside China. Actually, over 100 countries have now reported laboratory-confirmed cases of the new coronavirus.

What is really disturbing is that Italy reported a huge jump in total cases and deaths from the COVID-19 on Sunday, a surge from 4680 and 197 to, respectively, 7424 and 366, as one can see in the chart below. The jump in figures comes as the Italy’s government introduced a quarantine of 16 million Italians in the Lombardy region and 14 provinces and announced the closure of schools, gyms, museums, ski resorts, nightclubs and other venues across the whole country. In the US, more than 500 people have been confirmed to have the virus and more than 20 of them have already died.

Chart 2: Total number of confirmed cases of COVID-19 in Italy from February to March 2020.

The spread of the COVID-19 increased the risk of a full-blown world pandemic and global recession. The expected economic slowdown slashed the demand for oil. To make matters worse, the OPEC and Russia did not agree on production cuts. Instead, the Saudi Arabia slashed its April official selling price and announced plans to raise production in a bid to retake market share. As a consequence, the WTI oil price plunged below $30, or 34 percent in the biggest crash since 1991, as the chart below shows.

Chart 3: WTI oil price from March 3 to March 9, 2020.

Moreover, the stock market plunged again. The futures on S&P 500 went down 4.5 percent on Sunday evening in North America, and closed 7.5% lower (that’s over 225 points down). It’s not surprising that investors are fleeing equity and oil markets and increasing their safe-haven demand for gold.

Another positive factor for the gold prices is the collapse in the bond yields. The 10-year interest rates have plunged below 50 basis points on Sunday. As a reminder, in December 2019, the yield was slightly below 2 percent. It means a huge change. The bond market action implies that investors are expecting recession and the Fed’s accommodative response. It would be hard to imagine better conditions for gold to shine.

Chart 4: US 10-year Bond Yields from March 3 to March 9, 2020.

Implications for Gold

What does it all mean for the gold market? Well, I am of the opinion that the prospects for gold are positive. We have not yet reached the full-on panic. The epidemiological peak is still ahead of us. With Italy rolling out a massive quarantine, the fears over the COVID-19 impact on the supply chains and the global economy will intensify. Moreover, the biggest headwind to the gold market, i.e. strong US dollar, has been removed. As the Fed’s interest rates cut worked to soften the greenback, gold can now benefit from both the safe-haven demand and the weak 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!

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.

 

Fed Panics over Coronavirus. What’s Next for Gold?

Not during a regular monetary policy meeting, but in a surprising move. But what are the implications for the gold market specifically?

Fed Cuts Interest Rates in Emergency Move

Last week, I wrote that the spread of the new coronavirus to Europe and the inversion of the yield curve make “the Fed more likely to step in and cut the federal funds rate, you know, “just in case”. And in yesterday’s surprise move, the Federal Reserve cut the federal funds rate by 50 basis points in response to the coronavirus threat. The decision was unanimous and it was communicated in the FOMC statement as follows:

The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Without doubts, the move is huge. First of all, the US central bank cut interest rates not by 25 basis points, as usual, but by half a percentage point. It was the first such cut since the Great Recession. And the FOMC slashed the federal funds rate before its scheduled meeting on March 17-18, which is a very rare move. Taking monetary policy decisions between regular meetings with a bigger than normal interest rate cut, implies that the Fed is scared as hell.

Or that the US central bank was simply told to slash interest rates. Maybe not coincidently, the move came the same morning that G7 officials offered unspecified measures to help impacted countries. And President Trump has been tweeting intensively in recent days, pressuring the Fed to act. In yesterday’s morning, he wrote:

Australia’s Central Bank cut interest rates and stated it will most likely further ease in order to make up for China’s coronavirus situation and slowdown…Other countries are doing the same thing, if not more so. Our Federal Reserve has us paying higher rates than many others, when we should be paying less.

Fed’s Cut and the Economy

Will the Fed’s dovish action help to contain the virus? To ask such a question is to answer it. Will the Fed’s panic move fix the broken global supply chains? Another rhetorical question. The monetary policy is powerless when faced with supply problems. When you cannot get the necessary inputs from Asia for your factory, whether the interest rates are 50 basis points higher or lower is irrelevant for you. So, the Fed’s move is unnecessary and it will not help the global economy with the impaired supply chains.

What the Fed can do, is to trigger panic in the markets. Initially, the stock market welcomed the news. But later it turned sharply lower. It suggests that the Fed’s panic move made traders feel more nervous about the coronavirus and its impact on the economy. Indeed, the CBOE Volatility Index has returned to nine-year highs after the move.

After all, the Fed officials were talking all the time that they were monitoring the situation, that everything is fine, and then, boom, a surprise cut by 50 basis points! So investors could think “if they act like this, the situation must be worse than we thought”. Powell justified the move by the material reassessment: he said during the press conference that “the coronavirus poses a material risk to the economic outlook”.

Yeah, he suddenly realized it! For me, it looks like a panic response to the plunge in the stock market (Fed’s put is always is place!) and to the inversion in the yield curve. As you can see in the chart below, the 10-year Treasury yield has dropped to a record-low of 1.1 percent yesterday and later (not visible on the chart) even below 1.0 percent.

Chart 1: US 10-year Treasury yield from March 2019 to March 2020.

Implications for Gold

What does it all mean for the gold market? Well, from the fundamental point of view, the environment of fear, ultra low interest rates, weak equity markets and elevated stock market volatility should be positive for the yellow metal.

It’s true that gold saw a major sell-off last week. However, its price jumped again to $1,640-$1,650 in a response to the Fed’s move. The scale of a move might seem to be a bit disappointing, so investors should be aware of a possibility of further downside, as the precious metal will continue to feel some pressure from investors’ liquidity needs. However, it might be just a replay of 2008, when gold was initially dumped in order to meet investors’ margin calls only to rally later. The good news is that the markets expect further Fed’s interest rate cuts on the way – it lays the foundation for future gains in 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!

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.

Sweden Ends Its Experiment with Negative Interest Rates. Should Gold Be Worried?

In December, the Sveriges Riksbank, the world’s oldest central bank, has raised the main interest rate from -0.25 percent back to zero, ending its experiment with the negative interest rate policy, as the chart below shows.

Chart 1: Riksbank’s repo rate from January 2010 to January 2020.

This is a huge change. As a reminder, Riksbank was a pioneer of negative interest rates. As early as in 2009, it moved the overnight deposit rate below zero. Then, in 2015, the Swedish central bank cut its main interest rate, the repo rate, to -0.10, worried about the repercussions of the sovereign debt crisis in the euro zone. In 2016, Riksbank was forced to go further, setting the interest rates as low as -0.50 percent, to prevent a Japanese-style deflationary spiral in Sweden.

And now, after all these years, Riksbank abandons the negative interest rates, again being in the avant-garde of central banking, as policy interest rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary.

Why Riksbank has ended the NIRP? One explanation is that Sweden’s inflation rate is close to the target, so the monetary tightening was necessary. In other words, the NIRP did its job and was not needed any longer. As we read in the Riksbank’s press release,

Inflation has been close to the Riksbank’s target of 2 per cent since the start of 2017, and the Riksbank assesses that conditions are good for inflation to remain close to the target going forward.

It sounds plausible, but the truth is that inflation has been hovering around the target for a few last years, as the chart below shows. So why did the Riksbank decide to hike interest rates only now – and in face of weaker economic activity?

Chart 2: Sweden’s annual CPI rate from January 2015 to December 2019.

The answer is that Sweden’s central bank has finally acknowledged what we were writing from the very beginning of the NIRP, i.e., that the costs of this policy outweigh the benefits, euphemistically speaking. Indeed, Riksbank admitted itself that concerns about the side-effects of the negative interest rates on the economy contributed to its decision. As we read in the minutes from the December meeting,

a long period of negative interest rates may have negative side effects on the economy, as the draft Monetary Policy Report commendably describes. This is a parameter that we should take into account.

In particular, the Sweden’s central bank is worried about the health of the housing market and households’ level of debt. As Governor Stefan Ingves noted,

Let me add, as I often do, that the long-term development of the Swedish housing market entails a risk to the Swedish economy in both the short and long term. There are a number of structural problems in the Swedish housing market. This creates both imbalances and risks, in the form of high indebtedness among households, and economic inefficiency, in that it will be more difficult for people to move in connection with finding a new job.

Indeed, the real estate price index has increased 33 percent since 2015 (from 180 points to 240) and doubled since the Great Recession, while the household debt-to-GDP ratio has risen from 65 percent in 2008 and 82 percent in 2015 to 88 percent in 2019. Please note that the whole Swedish private-sector debt has climbed to 285.7 percent of GDP, one of the highest rates in the OECD.

What does it all mean for the gold market? Well, the Riksbank’s recent hike confirms that the ultra loose monetary policy in general and the negative interest rates in particular do not support the real economy, but they rather zombify it instead. They also boost asset prices and debt, increasing the risk of a financial crisis.

Sweden is relatively small economy, but the ECB or the Bank of Japan are not likely to follow suit and also end their romance with the negative interest rates anytime soon. The Fed claims that it does not want to go below zero, but Trump supports this policy, so who knows…

So, the fact that Riksbank ended its NIRP should not upset the gold bulls. They still can count on other, more systematically important, central banks. One day, the unexpected negative shock arrives and it will expose the fragility of the current financial situation, so carefully cultivated under the strange world of negative interest rates. Investors would then also rediscover the safe-haven allure of gold.

If you enjoyed the above analysis and would you like to know more about the fundamentals of the gold market, we invite you to read the February 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!

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 Investors Worry about Repo Market and Buy Gold?

$500 billion. This is the sum the Fed has already pumped into the repo market since the crisis there started. On September 17, 2019, the secured overnight funding rate – a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, based on the repurchase transactions – more than doubled, as the chart below shows, while the intraday range jumped to about 700 basis points! As a reminder, we are talking about the repo market, where interest rates usually fluctuate in an intraday range of 10, or at most 20 basis points.

Chart 1: Secured Overnight Financing Rate from January 2019 to January 2020.

 

But why we are writing about some obscure market at all? Well, a repo transaction is a short-term agreement to sell securities in order to buy them back at a slightly higher price. Or, effectively, it is a short-term (usually overnight) collateralized loan, in which the borrower sells a security (typically Treasuries) to the lender, with a commitment to buy it back later for the original price plus interest. So, the repo market is an important part of the financial market that redistributes liquidity between financial institutions, providing funds for those who need them. With daily turnover of about $1 trillion, the US repo market’s health is essential for the whole financial market to operate smoothly. Any disruption in this market could be fatal for other financial market segments and ultimately for the global economy. We are not exaggerating – the financial crisis of 2007-8 and the resulting Great Recession stemmed from a run on the repo market. Hence, the precious metals investors should be vitally interested in the ongoing repo crisis.

Given the importance of the repo market, it’s not surprising that the Fed intervened, injecting more reserves. What is surprising is that what was supposed to be one-off support, transformed into the steady purchases of Treasury bills at the pace of $60 billion per month. The Fed maintains that this is not quantitative easing, as the QE tries to control long-term interest rates, while repo market interventions focus on short-term interest rates. But, let’s be honest, the effect is the same: the US central bank purchases assets to flush banks with cash. Indeed, as one can see in the chart below, the Fed’s balance sheet is again rising!

Chart 2: Fed’s balance sheet from January 2008 to January 2020.

 

The implementation of the non-QE4 might be also surprising for those who believe in the mainstream explanations of the September crash in the repo market. The pundits argued that the crisis was caused by the due date for US corporate taxes and a large settlement of US Treasury securities. However, a few months have passed and the tensions in the repo market have not disappeared. It means that none of these temporary factors can fully explain the crisis. According to the latest Bank of International Settlements’ Quarterly Review, there are structural problems in play:

US repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (e.g. hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors. Finally, the stress may have been amplified in part by hysteresis effects brought about by a long period of abundant reserves, owing to the Federal Reserve’s large-scale asset purchases.

In plain English, banks don’t have enough reserves to keep markets liquid. Or, there is too little dollars chasing too many Treasuries. Courtesy of the President and the US Congress, there are simply too many government bonds issued to finance the mammoth fiscal deficit and not enough cash on the other side of the trade.

What does it all mean for the gold market? The repo crisis should be positive for the yellow metal. It shows that the US financial system is less solid than it was previously thought. So, it would imply a more dovish Fed and more risk-averse investors – both factors are fundamentally good for the gold prices, as the shiny metal is a safe-haven asset which also likes low real interest rates and easy monetary policy.

Of course, there is no mechanical link between the quantitative easing and gold. Actually, some of the rounds of QE were negative for the gold prices. However, this was because they have restored confidence among the market participants. But this time the situation is different as people worry why the heck the Fed was forced to start the non-QE and whether it will be able to exit the market without triggering serious consequences. Moreover, last year’s inversion of the yield curve and Trump’s unsound fiscal policy should add to the concerns and spur some safe-haven demand for gold amid the new QE which is – wink, wink – not the QE.

If you enjoyed the above analysis and would you like to know more about the fundamentals of the gold market, we invite you to read the February 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!

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.

 

Trump and Economic News That Drive Gold, Not Just Coronavirus

But we should not forget about other geopolitical and economic developments. What do they imply for the gold market?

Coronavirus, China’s Economy and Gold Prices

The number of cases of coronavirus reported by the WHO have increased from 45,171 cases and 1,115 deaths by February 12 to 51,867 cases and 1,669 deaths by February 16, 2020. However, the number of new cases is slowing down, which suggests that the epidemic could reach a turning point within weeks.

This is of key importance not only for the global health but also for the global economy, as the sooner the epidemic is over, the quicker China’s economy will recover. As a reminder, the quarantines of the whole cities like Wuhan and other compulsory measures disrupted the supply chains and hampered the Chinese economy.

However, gold bulls should not count on the coronavirus to dramatically hit the long-term economic potential of China. The epidemic will cause only a short-term slowdown, but it should not decrease the long-term economic growth. Investors should remember that the epidemic will be contained eventually and that geopolitical events and external shocks have only temporary impact the gold prices.

Industrial Production, Inflation, and Gold

In the last few editions of the Fundamental Gold Report, I focused on the coronavirus outbreak, the major threat for the global health and economy. But don’t forget about other important developments!

First, the CPI rose 0.1 percent in January, after increasing 0.2 percent in December, marking the smallest increase in four months. The analysts expected stronger move. However, the annual inflation rate moved from 2.3 percent in December 2019 to 2.5 percent, the highest level since October 2018. The core CPI, which excludes food and energy prices, rose 0.2 percent on a monthly basis and 2.3 percent on an annual basis, the same increase as reported in the previous 3 months, as the chart below shows.

Chart 1: Annual percentage change in the US CPI (green line) and the core CPI (red line) from January 2015 to January 2020.

Although inflation edged up in January, it remains subdued. It means that the Fed is unlikely to raise the federal funds rate in the nearest future, especially now, when the economic damage caused by the coronavirus is unknown yet. Low inflation decreases the gold’s appeal as inflation hedge, but it also implies that the Fed is likely to remain dovish, which is positive for gold prices.

Second, on Friday, the Federal Reserve reported that industrial production decreased 0.3 percent in January, marking the fourth decline in the past five months. It means that the industrial sector remains in the recessionary zone. However, the decrease mainly reflected unseasonably warm weather that held down the output of utilities and a significant slowdown in civilian aircraft production, as Boeing completely suspended the 737 MAX production after two deadly crashes in 2019.

So, while the total manufacturing index declined 0.1 percent, it rose 0.3 percent, when excluding civilian aircraft. Moreover, the Manufacturing ISM index registered 50.9 percent in January, returning to expansion territory for the first time since July 2019. It offers some hope that the industrial sector will revive later this year. Of course, it would be better for gold if industrial recession not only remains with us but also spreads to other sectors of the economy.

Trump’s Acquittal and Gold

Because of the coronavirus, I haven’t yet analyzed Trump’s acquittal in his recent impeachment trial. In February, the Republican-led Senate acquitted the President of abuse of power and obstruction of Congress, ending the impeachment saga.

What’s next? Well, some analysts fear that Trump’s victory could embolden him to further expand executive power while avoiding accountability. President has already fired a few officials who testified against him in the impeachment inquiry.

Trump’s acquittal should also strengthen the President. Indeed, after the historic vote, Trump had the highest approval rating of his presidency – 49 percent in a Gallup tracking poll, which increases his chances to win the election in November. As Trump implies the status quo, his reelection should not impact the gold prices significantly. For the yellow metal, Sanders or Warren, with their radically progressive proposals, should be much better.

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 – 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.

Coronavirus, Powell and Gold

How did gold perform, and what can we expect from the king of metals next?

Should We Stop Worrying about the Coronavirus?

Well, that was a quick escalation. On February 2, when we wrote the first Fundamental Gold Report about the coronavirus, there were 14,557 confirmed cases and 305 deaths. Yesterday, the World Health Organization reported almost 45,171 cases and 1115 deaths. So, the number of infections and death toll of coronavirus have surged in recent days. Moreover, China has changed today its diagnosis methodology (to include “clinically diagnosed” cases), confirming 15,152 new cases and 254 additional deaths. Hence, as the chart below shows, the total number of cases in China has reached 59,800, while the global number has already surpassed 60,000.

Chart 1: Cases of Coronavirus in Mainland China

Meanwhile, the US stock market reached record closing highs yesterday as the chart below shows. Are investors blind? Are they irresponsible optimists? Well, it’s true that the Fed’s cheap money enables traders to have fun while the world is burning.

Chart 2: S&P 500 (green line, left axis) and gold (yellow line, right axis, in $) in 2020

But there is also a true ray of hope. Not counting today’s spike in new cases in China caused probably by the change in the methodology, the number of new cases reported daily there has been on a downward trend since February 4. It means that transmissions are still occurring but at a slower rate, which gives hope that the outbreak may be approaching its peak.

However, it’s far too premature to say that the containment is working – the case may be simply unconfirmed. And the virus may still spread outside China. Moreover, investors should remember that the economic impact of the new coronavirus is likely to be greater than in case of the SARS outbreak nearly 20 years ago. This is because: 1) it already killed more people than SARS did; 2) China’s government has taken more drastic measures – for example, many Chinese factors have been shut – to contain the epidemic; 3) China’s economy is now about four times greater than two decades ago.

Some analysts slashed their forecast for China’s growth in 2020 to as low as 5 percent. When the virus is contained and the factories reopen, there will be a rebound, but there is no doubt that we will see a serious slowdown in Chinese growth in the first quarter and in global growth in the next few months.

Powell Remains Optimistic

Federal Reserve chairman Jerome Powell testified before the Congress this week. He reiterated his confidence in the sustainability of the record-long US economic expansion, saying that “there’s no reason why the current situation of low unemployment, rising wages, high job creation – there’s no reason why it can’t go on”. Powell admitted that the outbreak of the new coronavirus will impact China and that there will “very likely be some effects on the United States.” But he argued that it was too early to determine what those effects would be and would they lead to a material reassessment of the outlook.

However, Powell opened the door to increase asset purchases aggressively if needed. He said that the Fed has, aside the interest rates, two tools to fight the recession: forward guidance and quantitative easing. And that “we will use those tools — I believe we will use them aggressively should the need arise to do so.” That would be music to the gold bulls’ ears!

Implications for Gold

What does it all mean for the gold market? Well, the coronavirus has not made gold rally. Investors probably are aware that the current uncertainty is temporary and once the coronavirus is contained, global growth will resume. What is important is that the central banks will remain very accommodative until there is some resolution on the coronavirus. The fresh liquidity will support the risky assets. It seems to be negative for safe-havens such as gold, but the yellow metal often moves in tandem with the stock market in times of monetary accommodation. The chart above clearly shows that although gold has not rallied like crazy due to the coronavirus, it has been resilient when the fears subsided a bit.

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 – 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.

Is Coronavirus the Black Swan That Takes Gold To-Da-Moon?

Recession, anyone? And what exactly does the inversion imply for the gold market?

Yield Curve Inverts Again

Ooops, it happened again – the yield curve has inverted! Please take a look at the chart below. It shows that at the turn of January and February, the spread between 10-year and 3-month Treasuries has dived below zero once again. It stayed below zero only for a couple of days before moving back into the positive territory. The inversion was shallow as the level of the spread did not plunge below minus 0.4.

Chart 1: Spread between 10-year and 3-month Treasuries from January 1, 2019, to February 5, 2020.However, the fact that the yield curve has inverted again after the October 2019 normalization, is of great importance. It shows that the underlying forces behind all the 2019 inversions are still in force. It shows that the Fed’s easing of monetary policy did not heal the economy.

The US central bank cut interest rates three times in 2019, partially because of the worries about the inversion of the yield curve. Initially, it seemed that these cuts helped, as the yield curve reinverted in October and stabilized in the positive territory for a few months. But now it should be clear that the Fed just postponed the inevitable. We mean here, of course, recession.

We still do not know when exactly the next economic crisis comes – other indicators suggest the US economy remains strong – but the latest inversion of the yield curve shows that the recessionary fears are still justified, despite the temporary calming down. But, as we all know, it’s always calm before the storm.

Coronavirus and Yield Curve

Now, let’s dig deeper into the cause behind the recent inversion of the yield curve. Please take a look at the chart below. As you can see, the yield curve has inverted this time not because of the rise in the short-term interest rates, but because of the drop in the long-term bond yields.

Chart 2: 10-year Treasuries (green line) and 3-month Treasuries (red line) from March 2019 to February 2020.

It show that investors worry about the prospects of the global growth amid the coronavirus outbreak. These concerns about the negative impact of the virus on the world’s trade and pace of economic growth pushed investors from the stock market into safe-haven assets such as the long-term government bonds. After all, the impact on the global economy from the SARS epidemic reached up to $40 billion, according to this research, but as coronavirus is more contagious, its economic costs may be higher.

So, although the short-term interest rates did not spike, which could tighten financial conditions and trigger recession, the inversion of the yield curve is still positive for the gold prices. Investors expect that the growth will slow down or/and that the Fed will cut the federal funds rate again later this year. Indeed, traders bet that the US central bank will deliver one cut in July, but they have also increased their bets on two cuts.

Implications for Gold

When the spread between 10-year and 3-month Treasuries bottomed out, the price of gold jumped above $1,580. And the current fears about coronavirus may support it in the short-term. However, as we wrote on Monday, fears about previous virus outbreaks were overblown in hindsight. Therefore, the current anxiety may be only temporary. The yield curve has already reinverted (but another inversion is probable) while the stock market shook off the fears and rebounded. Hence, don’t necessarily expect gold prices skyrocketing. However, the yellow metal performed greatly in 2019 due to the recessionary fears. So, if they settle in again on a more permanent basis, gold bulls would get an ally.

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 – 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.

Another Repo Market Liquidity Injection for Gold Bulls to Cheer

Repo Crisis Is Not Over

Last week on Thursday, the New York Fed added $83.1 billion in temporary liquidity to financial markets. And banks’ demand for liquidity flared up again on Tuesday. If you haven’t heard of it, don’t worry – almost no one did. After all, journalism is about covering important stories… with a pillow!

The Fed not only injected some fresh liquidity, but also noted that it “may keep adding temporary money to markets for longer than policy makers had expected in September,” at least through April. So much for the normalization of monetary policy…

Please look at the chart below. It shows the Fed’s balance sheet in 2019. Although the U.S. central bank has managed to shrink its assets a bit compared to the peak of $4.516 trillion from early 2015, the quantitative tightening has ended quickly.

Chart 1: Fed’s balance sheet in 2019 in trillion of US dollars.

Last September, in a response to the repo crisis, the Fed started again buying assets (but do not call it quantitative easing, this is, wink, wink, something different). Actually, the recent liquidity injections have already reversed all the tightening that occurred earlier in 2019. The Fed added more than $400 billion to its balance sheet, rasising it from the lows of $3.76 trillion up to $4.165 trillion at the end of December. And Thursday’s move will add even more to the Fed’s balance sheet!

What is important is that the liquidity shortage in the U.S. repo market was not a one-off event, but that it has become a structural problem. As the December report from the Bank of International Settlements explains,

U.S. repo markets currently rely heavily on four banks as marginal lenders. As the composition of their liquid assets became more skewed towards US Treasuries, their ability to supply funding at short notice in repo markets was diminished. At the same time, increased demand for funding from leveraged financial institutions (eg hedge funds) via Treasury repos appears to have compounded the strains of the temporary factors.

To simplify, there is too little cash and too many government bonds. Well, traders can thank President Trump who has increased significantly the fiscal deficit. As the Congressional Budget Office estimated last week, the federal deficit rose 12 percent in the first quarter of fiscal year 2020 compared to the same period last year. Larger deficit means more Treasuries coming into the market, putting an upward pressure on interest rates.

Implications for Gold

The additional cash injections from the Fed are fundamentally positive for the gold market. First, they act similarly to an additional interest rate cut. Second, they suggest that the financial market is less liquid and healthy that it might seem at first sight. They show that the liquidity shortage has not ended – and that it could trigger an important turmoil in 2020. Gold should shine then!

And let’s not forget about the crazy fiscal policy. So, it might be the case that 2020 will be, after all, better for the gold prices than we previously thought. We expected less insane fiscal policy, but with such huge deficits, the macroeconomic outlook for gold looks more optimistic. However, it’s a bit too early to radically change our view – we will return to this issue, as we always do, in the new edition of the Gold Market Overview. Stay tuned!

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 – 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.

Will Weaker Than Expected Payrolls Support Gold Prices?

December Payrolls Below Expectations

The U.S. created 145,000 jobs in December, following an increase of 256,000 in November (after a downward revision), as the chart below shows. The nonfarm payrolls came below expectations, as the analysts forecasted 165,000 new jobs. The gains were widespread, but with a leading role of retail trade (+41,200), leisure and hospitality (+40,000), and education and health services (+36,000). Manufacturing again cut jobs (-12,000), which means that industrial recession has not ended. Mining and transportation and warehousing also dismissed workers.

Chart 1: U.S. nonfarm payrolls (green bars, left axis, change in thousands of persons) and the unemployment rate (red line, right axis, %) from January 2015 to December 2019.

The surprisingly weak headline number was accompanied by downward revisions in November and October. Counting these, employment gains in these two months combined were 14,000 lower than previously reported. Consequently, the job gains have averaged 184,000 per month over the last three months, and 175,000 so far this year – still pretty good but significantly below the average monthly gain of 223,000 in 2018. In consequence, the payroll employment rose by 2.1 million in 2019, down from a gain of 2.7 million in 2018.

Although the pace of job creation has slowed down, the unemployment rate remained unchanged at 3.5, as the chart above shows. So, it is still at the 50-year low and does not send any recessionary warnings.

Last but not least, the low unemployment rate did not translate into significantly higher paychecks. The average hourly earnings for all employees on private nonfarm payrolls have increased only 2.9 percent over the last twelve months, following 3.1-percent rise in November. Actually, the pace of hourly wage growth fell below 3 percent for the first time since September 2018.

To sum up, although the December jobs report surprised the markets on the negative side, the U.S. labor market in 2019 was quite solid. While hiring has slowed, the unemployment decreased from 3.9 to 3.5 percent over the year, while the number of unemployed persons declined from 6.3 to 5.8 million. What is perhaps a bit astonishing is that the wage growth fell to 2.9 percent, which means that despite the ninth straight year of job creation and very low unemployment rate, the wage pressure is still moderate.

Implications for Gold

But the U.S. labor market is still doing relatively well, which – combined with the lack of strong wage pressure – should make the Fed to keep the interest rates unchanged in the foreseeable future. The fact that the U.S. central bank has no reason to hike the federal funds rate is positive for the gold prices. And indeed, the yellow metal rose on Friday, and weaker-than-expected U.S. jobs data could help here.

But beware! The resilience of the labor market also reduces the odds for a dovish move. Actually, some traders have started to price in the possibility of the interest rate hike by the end of 2020, which could harm gold. Indeed, the minutes from the last FOMC meeting indicate that the Fed officials become more optimistic about the U.S. economy in December as trade tensions with China eased, while the global economy stabilized somewhat. Thus,

while many saw the risks as tilted somewhat to the downside, some risks were seen to have eased over recent months. In particular, there were some tentative signs that trade tensions with China were easing, and the probability of a no-deal Brexit was judged to have lessened further. In addition, there were indications that the prospects for global economic growth may be stabilizing.

And the fresh remarks from the Fed officials have become even more optimistic since their last meeting. We do not expect them to return to a hawkish mode – especially in light of the liquidity crisis in the repo market – but the change in rhetoric should not be neglected by the gold investors.

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 – 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.

The Gold Market in 2019

Another year has passed! And we gave another accurate prediction. In the January 2019 edition of the Market Overview, we wrote:

All these factors make us to believe that 2019 fundamental outlook for the gold market is better than one year ago (…) Hence, we should see better price performance next year.

Fast forward to January 2020 – we line now in the twenties! – it turned out that we were right again. Just look at the chart below, which paints the gold prices over the last year. The yellow metal entered 2019 quoted at $1279, and finished the year at $1474 (as of December 18).

Chart 1: Gold prices (London P.M Fix, in $) from December 2018 to December 2019.

So, gold rose more than 15 percent last year (as of December 20), which was perfectly in line with my fundamental expectations! I did not expect a massive rally (“we are not saying that bullion will start to rally. What we are saying is that fundamental factors should become (…) more friendly toward gold”). And indeed, a 15-percent jump is impressive, but the yellow metal did not enter the full-blown bull market. Nevertheless, 2019 was definitely better for gold prices than 2018, when the yellow metal dropped slightly.

We can distinguish four phases in the gold market in 2019:

• the bullish phase that lasted until mid-February, the price of gold increased from $1,279 to $1,344, or 5 percent;
• the bearish period that ended at the end of May, when gold prices declined to $,1271, or more than 5 percent, erasing all previous gains;
• the super bullish phase that lasted until early September, when the price of gold reached its peak of $1,546, soaring 21.6 percent in just three months; and
• the bearish remainder of the year, during which the yellow metal declined to $1474, or 4.7 percent.

What were the drivers behind gold’s behavior during these phases? One important factor was the monetary policy. Gold started to go up at the very end of November 2018, when Powell delivered speech considered as dovish. But the February minutes were perceived as more hawkish than expected, which sent gold prices down. Moreover, the ECB adopted a more dovish stance later, which strengthened the U.S. dollar, while weakening both the euro and gold.

However, in May, the yield curve has become even more inverted, which triggered recessionary fears and pushed investors to expect a more dovish actions from the Fed. And indeed, the U.S. central bank started to signal more accommodative stance and even cut the federal funds rate three times. But precious metals investors bought the rumor and sold the fact, as the price of the yellow metal started to decline since early September, amid the interest rates cuts. They could have also hoped for the lengthy cutting cycle, but the Fed decided to deliver only “mid-cycle adjustment” instead.

Let’s not forget about the greenback and the U.S. real interest rates – two of the most important drivers of the gold prices. As one can see in the chart below, the dollar index, which measures the strength of the American currency against its peers, reached a local peak at the end of May, when gold started its rally.

Chart 2: The U.S. real interest rates (red line, right axis, yields on 10-year Treasury Inflation-Indexed Security) and the U.S. dollar index (green line, left axis, Trade Weighted Broad U.S. Dollar Index) in 2019.

The real yields were also important, as they bottomed out around the beginning of September, when the price of the yellow metal reached its 2019 peak. What is interesting is that gold peaked together with the U.S. dollar, which suggests that both were considered as safe havens during elevated worries about recession. The increase in the interest rates since then pushed gold prices lower, despite the depreciation of the U.S. dollar.

And what about 2020 – will gold soar even more, shifting up a gear, or will it decelerate, after a good year? Well, nobody knows this for sure. But what we know is that – unless the next economic crisis arrives – the U.S. central banks is likely to remain neutral (or to slash interest rates once, according to the CME FedWatch Tool). Given the Fed cut interest rates three times in 2019, it implies that the monetary policy will be less supportive for gold prices. Moreover, the federal deficit is going to increase, which should lift the Treasury yields, putting downward pressure on the yellow metal. Last but not least, the reached “phase one” trade deal and the triumph of Conservatives in the British parliamentary elections mean that the uncertainty over the trade wars and Brexit should diminish.

So, unless anything ugly happens, the macroeconomic environment could be less supportive for gold than in 2019. However, bad things do happen, and, according to Murphy’s law, anything that can go wrong will go wrong. Hence, the gold fundamentals may turn out to be more positive for gold over the year. After all, the yield curve has inverted last year and we are already observing some recessionary trends, especially in the manufacturing sector and among the small-sized companies. So, from the fundamental point of view, the first half of the year may be not the best for gold, but we could possibly see an improvement later.

If you enjoyed the above analysis and would you like to know more about the fundamentals of the gold market, we invite you to read the January 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!

Thank you.
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 Above $1,600 As Iran Retaliates

Iran Retaliates, Gold Rallies

On Tuesday, I wrote that “given that Soleimani was widely seen as the second most powerful figure in Iran, we should expect a response.” And, indeed, it arrived before too long. On Wednesday, just hours after the funeral of the Iranian general, Iran launched a missile attack on two military bases in Iraq housing U.S. troops.

In the last edition of the Fundamental Gold Report, I also wrote “the elevated geopolitical risks may support the gold prices, at least in the short-term.” Indeed, gold got support – and what a strong one! Please take a look at the chart below. As one can see, the price of gold spiked to above $1,610, the highest level since February 2013.

Chart 1: Gold prices from January 7 to January 9, 2020.

However, the rally was not sustainable. When the dust settled, it turned out that there were no casualties, and gold returned below $1,600. Moreover, both countries sent signals that they did not go to war. Iran’s foreign minister said that Iran had taken “proportional measures in self-defense” and didn’t seek further escalation of the conflict. Some analysts speculate that the said Iranian officials even warned the U.S. the strikes were coming, as they did not want to kill Americans, but rather to appease Iranian citizens calling for revenge. Meanwhile, President Trump tweeted that “all is well” in the immediate aftermath of the attack. Later, he suggested that the U.S. is not planning to retaliate:

No Americans were harmed in last night’s attack by the Iranian regime. We suffered no casualties. All of our soldiers are safe, and only minimal damage was sustained at our military bases (…) Iran appears to be standing down, which is a good thing for all parties concerned and a very good thing for the world (…) The fact that we have this great military and equipment, however, does not mean we have to use it. We do not want to use it. American strength, both military and economic, is the best deterrent.

The whole statement indicated an important de-escalation in the conflict, which created downward pressure for gold prices. The price of the yellow metal has already decreased below $1,550.

Implications for Gold

What does it all imply for the U.S.-Iran conflict and the future of gold? Well, although the tensions have been put on the back burner somewhat, it would be naïve to think that Iran is done retaliating. The recent attacks were just a first strike, or a symbolic response necessary to save face after Soleimani’s death. But confrontation will almost certainly explode again at some point this year. So, gold could receive support then.

However, while not minimizing the importance of geopolitical risks for investing in precious metals, I am of the optinion that macroeconomic factors are far more impactful when investing long-term. The recent developments in Iraq do not change the fundamental outlook for gold. And it has deteriorated somewhat, at least when compared to 2019. Thus, while not being a bear, I expect that after a solid beginning of the year, gold may struggle somewhat.

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 – 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.

Setting Gold Market Expectations for 2020 Right

Gold at the End of 2019

The last year was a very good one for the gold bulls, as one can clearly see in the chart below. Despite the soaring equities, the price of the yellow metal rose from $1279 to around $1520, or more than 18 percent. Bravo!

Chart 1: Gold prices in 2019.

In particular, gold managed to jump again above $1,500 at the very end of December, which confirms that the turn of the year is usually positive for gold prices. In the last few years, gold rallied in the beginning of year. So, looking at gold’s seasonality, January could be positive for the price of the yellow metal. But what about the rest of the year? Below I offer a few key insight. The more detailed fundamental outlook for gold in 2020, I provide in January edition of the Gold Market Overview.

Fundamental Outlook for Gold in 2020

From the fundamental point of view, 2020 may be worse for the yellow metal than in 2019. This is because the dovish central bank pivot that drove precious market in 2019 is largely behind us. The impact of existing accommodative U.S. fiscal policy is fading. The fears of recession are receding. The risks of the full blown U.S.-China trade war and a hard Brexit have diminished.

In other words, the monetary policy will be more hawkish than in 2019, while the fiscal policy will be similarly easy, supporting the U.S. dollar. The geopolitical headwinds have softened, which should help the risky assets and bond yields. So, we could see strong dollar, higher real interest rates and lower risk aversion – a very bad combination for the price of gold.

On the other hand, the next Fed move will be an interest rate cut, which can happen as early as this year. The expectation of a dovish move could support gold prices. Moreover, the U.S. GDP growth is expected to slow down, while inflation may finally rise. Meanwhile, growth may accelerate in other countries – if that happens, the greenback may weaken. Flatter U.S. growth with higher inflation and weakening dollar seems to be a positive combination for the gold prices.

However, the dovish expectations are already priced in to some extent, while inflation will not soar, but edge up, if at all. Given the dovish stance of the ECB and Bank of Japan, the U.S. dollar may remain relatively strong. This is why our base case is that fundamental outlook has deteriorated somewhat and after possibly pleasant beginning of the year, gold may struggle further down the road.

But black swans are flying just above the market surface. So, investors should be aware that they could be hit at some point with the harsh reality of economic slowdown in China and other countries, debt saturation, declining corporate profits, and uncertainty about the outcomes of the U.S. elections. In such an environment, gold will continue to be seen as an important safe-haven asset.

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 – 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 in 2019: Lessons for the Year Ahead

Key Lessons For Gold Investors from 2019

Today is the last day of 2019. It was a good year for the gold bulls, as one can clearly see in the chart below. The price of the yellow metal increased from $1279 to $1474 (as of December 18 – yes, we wrote this article before the festive break). It means that gold rose more than 15 percent in 2019. The gold bulls cannot complain!

Chart 1: Gold prices (London P.M Fix, in $) from December 2018 to December 2019.

The main driver behind gold’s success were fears of a U.S. recession and the related dovish U-turn within the Fed, which cut the federal funds rate three times after hiking it four times in 2018.

However, it was not surprising. After four hikes in 2018, it was more than certain that the Fed’s stance would become more dovish and that the price of gold would then react favorably. What could be less expected was that the gold’s appreciation would occur simultaneously with the strengthening U.S. dollar. As the chart below shows, we have not observed the traditional strong negative correlation between the greenback and the yellow metal. Actually, both assets moved in tandem strongly up during the summer!

Chart 2: Gold prices (yellow line, left axis, P.M. Fix, in $) and the broad trade weighted US dollar index (red line, right axis) from January to December 2019

Why? The recessionary fears boosted both the U.S.-denominated government bonds and gold. Although the yellow metal is the ultimate safe-haven, the U.S. Treasuries can also behave like a safe haven, at least when compared to other assets – due to the large liquidity flows they’re able to absorb. So, as I always repeat, do not mechanically follow gold’s correlations, but always look at the broader macroeconomic context!

The relationship between gold and the real interest rates seemed to be stronger in 2019. As one can see in the chart below, the peak in gold prices corresponded with the bottom in the bond yields. However, the correlation was far from being perfect. The real rates have been rising since January, while gold remained in a sideways trend until late May. It confirms that gold market is very complex and that gold investors should not count on simple automatic reactions.

Chart 3: Gold prices (yellow line, left axis, P.M. Fix, in $) and the yields on 10-year inflation-indexed Treasuries (green line, right axis, in %) from January to December 2019

Implications for Gold in 2020

Gold showed in 2019 that it can shine even when the U.S. dollar appreciates and the stock prices reach new record levels. So, 2020 does not have to turn out badly for the gold market. However, the Fed is going to be neutral or cut interest rates once at most. It means that the U.S. central bank will be less dovish than in 2019. While this needn’t be a disaster for the yellow metal, investors should acknowledge that gold fundamentals are likely to deteriorate somewhat next year (unless the next crisis occurs). Fundamentals are, of course, not everything, but it seems to me that gold would welcome some ignition to beat or come on par with its performance in 2019.

Anyway, tomorrow will be already January which used to be a positive month for gold prices.

So Happy January and the whole 2020! And let all the gold come to you in the New Year… and in the 2020s!

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 – 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.

Trump Impeached in the House! Is It Time for Gold Now?

Trump’s Impeachment, Explained

On Wednesday, the House of Representatives impeached Donald Trump. He became only the third U.S. president in history to be impeached, following Andrew Johnson in 1868 and Bill Clinton in 1998.

According to the Constitution, the President “shall be removed from Office on Impeachment for, a Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors”. Democrats created two articles of impeachments which refer to these other high crimes and misdemeanors. The first one accuses Trump of abusing his power by pressuring Ukraine to investigate Joe Biden, the former U.S. Vice President, in order to interfere in the 2020 presidential election.

The House of Representatives also accused Trump of obstruction of Congress by directing administration officials and agencies not to comply with lawful House subpoenas for testimony and documents related to impeachment. The abuse of power article was passed on a 230-197 vote and the obstruction article was passed by 229-198.

Trump denies any wrongdoing, calling the impeachment inquiry a “witch hunt”. Who is right? Well, we do not know. We are neither Trump’s supporters, nor Democrats’ fans – but let’s face it: the whole process is very political. Democrats are still furious after Hillary Clinton’s loss in 2016 and hate Trump. They hoped for several months that “Russiagate” would enable them to remove Trump from office, but it didn’t work out. So they are taking their chances once more, although the White House’s record of the call between Trump and Ukraine President is far from being a clear case for high crime, especially when you compare it to the Watergate scandal or Bill Clinton’s lying under oath about his sexual relationship with Monica Lewinsky.

However, there may be more to the story than politics and hatred of political parties. We mean here the hostility of the so-called “deep state” or “intelligence community” directed at Trump who is an outsider. Interestingly, even mainstream media started to notice that there is a real enmity between Trump and agencies such as the CIA and the FBI (to be clear, we do not claim that Trump is without sins, but that there is a kind of bias against Trump among the so-called establishment).

Anyway, impeachment does not imply removal from office. No president has been ever removed from office by impeachment and Trump is not likely to become the first one. That would require a two-thirds majority in the Republican-controlled Senate. So, at least 20 Republicans would have to join Democrats in voting against Trump to convict him. This is unlikely to happen.

Implications for Gold

What does the impeachments theater mean for the gold market then? The risk of impeachment should theoretically support the safe-haven assets such as gold. However, given the low odds of Trump being removed from office, the markets are little moved. The yellow metal also has shrugged off the news from Washington, DC, as the chart below shows.

Chart 1: Gold prices from December 16 to December 19, 2019

The price of gold has increased the following day, but it can hardly be called a rally. Having said this, the end of year is positive for the gold market, given the unfavorable environment. I mean here the fact that the phase one trade deal between the U.S. and China was signed, while the Conservative Party’s victory in the UK parliamentary elections cleared the path to Brexit in 2020. As two important headwinds for the global economy softened, one could reasonably expect that the price of gold would dive. After all, the risk appetite came back to the markets, bond yields increased, while equity markets reached record highs. And yet gold remained in a narrow trading range of $1,460 and $1,480. It seems that the yellow metal is preparing for a big move – now the question is in what direction (fundamentals suggest rather a decline, while the gold seasonal pattern favors an increase).

Chart 2: Gold True Seasonal Chart for Q4 2019

Depending whether you are a bull or a bear, we wish you to be content with the upcoming move!

We hope that you behaved well all the year and that Santa Claus will not impeach you… Merry Christmas!

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 – 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 and Lagarde – Friends or Foes?

Key Takeaways From First Lagarde Monetary Policy Meeting as ECB President

Last Thursday, the ECB held its December monetary policy meeting. The central bank maintained its stance steady, keeping the interest rates unchanged. However, the ECB has revised slightly down the outlook for real GDP growth for 2020, while the outlook for HICP inflation went slightly up.

But the main change occurred in the position of the President. Christine Lagarde has replaced Mario “whatever it takes” Draghi. Of course, it has happened some time ago, but only now she chaired her first monetary policy meeting and held a post-meeting press conference as the ECB President. What do her remarks and her presidency in general imply for the ECB’s future and the gold market specifically?

First of all, we are now sure that the dovish stance on monetary policy will be prolonged. Lagarde confirmed the status quo on interest rates, quantitative easing, etc. She said that “All right, on the toolbox, I’m not going to revisit the past (…) Policy decisions that were made, stand, and were re-endorsed yet again”.

Moreover, Lagarde communicates with the market pretty well. She reminded the audience in the very beginning that each president has his or her own style of communicating, so the analysts should not overinterpret her words. She also nicely escaped from being compared with Draghi, or being classifying as dove or hawk. Lagarde said that “I’m neither dove nor hawk and my ambition is to be this owl that is often associated with a little bit of wisdom”. Nice rhetoric, Madame, but let’s be honest, we all know that deep down you are a dove.

Indeed, Lagarde was rather candid on the negative interest rates. She did not criticize them and she did not announce any normalization. Instead, when asked about the existence of a “reversal rate”, i.e. a policy rate whose adverse consequences outweigh the positive effects, she replied that it’s not the case in the Eurozone. So, the madness of negative interest rates will continue. Is it really wisdom, Madame?

Last but not least, Lagarde announced that a top-down review of the ECB’s strategy would get underway in January with a view to being completed by the end of 2020. And guess what, she did not say that, but I bet dollars to doughnuts that the review will call for a more symmetric inflation goal. As a reminder, the ECB aims to reach inflation rate at a level sufficiently close to, but below, 2 percent. I can imagine that the phrase “but below” must be a thorn in Lagarde’s side. She already said during the press conference, that inflation at 1.7 percent is not close enough…

Implications for Gold

What does it all mean for the ECB’s monetary policy and the gold market? Well, Lagarde is consensual. Lagarde speaks nicely. Lagarde smiles. But beware of the central banker! Don’t be fooled by Madame Lagarde’s charm. If it looks like a dove, flies like a dove, and coos like a dove, then it probably is a dove. And, indeed, Lagarde is a dove, or actually an ultra dove. So, we expect the status quo on the very easy ECB’s monetary policy to continue, at least until the other members of the Governing Council express their objections.

Unfortunately, from the fundamental point of view, Lagarde’s dovishness is not helpful for the gold prices. Fundamentally, I mean the fact that dovish ECB, or the ECB more dovish than the Fed, should work to weaken the euro against the U.S. dollar. And the dollar’s strength should keep a downward pressure on gold prices.

However, please note that the status quo of the ECB was already priced in. The EUR/USD exchange rate was barely influenced by Lagarde’s press conference, as the chart below shows (the later sharp moves were caused by the outcomes of the UK parliamentary elections and Trump’s tweets about trade policy).

Chart 1: EUR/USD exchange rate from December 6 to December 19, 2019

So, technical factors are also important in the gold market and right now, they might actually play first fiddle as we are approaching January, which is historically a positive month for the gold bulls.

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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.