Coffee Futures Surge Due to Brazil Frosts

The pandemic’s impact on the availability of soft commodities like coffee and sugar has been real, with both soft commodities trading at multi-year highs. However, growing seasons marred by adverse conditions are worsening global supply, leading to further surges in prices.

Coffee Prices at 7-Year Highs

On the week of July 19, coffee futures soared by 20% as unseasonally cold weather in Brazil threatened the coffee crops of the world’s largest producer. By market open on Monday, July 26th, they had risen by a further 10%. This has taken coffee prices up to their highest levels since October 2014.

It started with a shortage of shipping containers earlier in the year, which gave commodities across the board a boost due to difficulties in ramping up global transportation following the lockdowns. Then, seriously dry conditions in May followed by frosty conditions in the crop’s flowering period in July, have severely stressed the country’s coffee crop. The extent of the damage has yet to be fully determined. The country’s food supply agency has estimated that around 11% of Brazil’s coffee crops have been affected by frost.

On and Off Years

Coffee plants follow a biennial crop cycle, characterised by “on” and “off” years. 2022 was due to be an “on-year” for coffee producers, an opportunity to build waning stockpiles with a bumper crop. The combination of drought and crop stress makes it highly unlikely that Brazilian producers will now have the opportunity of an on-year to rebuild stocks. This almost guarantees higher coffee prices for consumers and is also likely to affect smaller coffee businesses that don’t have the same purchasing power as the large coffee chains.

Price Action

Looking at coffee futures plotted on a monthly chart reveals the true extent of the move. Coffee futures have broken through a price level at $1.75 per pound that offered resistance back in both 2008 and 2016.

In the past decade, coffee prices have only peaked higher on two occasions. An extremely wet December at the close of 2013 was followed by Brazil’s worst drought in decades, which damaged coffee plants and led to a 5.4% downturn in production. The even more significant peak in 2011 has been attributed to a combination of factors. Poor harvests, investors trying to get ahead of price inflation following central bank responses to the 2008 financial crisis (recall that gold’s former all-time high was also in 2011), and surging global appetites for gourmet coffee have all been used to explain the surge.

At HYCM, we recently focused on coffee and sugar prices as evidence of the inflationary pressures mounting following the global response to COVID-19. Even before this recent move, the charts were suggesting a bull market that had no intentions of ending any time soon. This most recent rally has effectively set the first monthly higher-high we’ve seen in the agricultural commodity in 5 years.

Going Back Further

If you look back even further into the historical price action of coffee, you’ll notice that it’s an extremely volatile commodity that’s highly sensitive to growing conditions and consumer demand. The chart below tracks monthly coffee prices going all the way back to the 1970s. As you can see, while coffee has experienced supply/demand shocks in the mid-80s and mid-to-late-90s, the 2011 monthly close is only bested by the all-time high the commodity reached in 1977.

Back then, a severe frost in July 1975 destroyed two-thirds of the Brazilian crop. With replanted crops taking up to three years to return to full yield, you can understand why the global coffee market was so severely affected. A civil war in Angola, the fourth largest coffee producer at the time, also had the effect of removing a significant amount of the commodity from global markets.

However, when you look at the macro conditions back then, low growth and rising inflation (or stagflation as the combination was termed), you can see why a supply shock in a commodity known for being highly sensitive to weather conditions can get so out of hand.

The reason to look as far back as the 1970s is that many analysts and market commentators weighing in on the current inflation vs deflation debate see a return to 1970s style stagflation as a possibility. The expectation is that as growth slows when the effect of stimulus on economic activity wanes, we’ll be left with the result of all the monetary expansion, which is higher prices as more money competes for scarce assets.

Final Thoughts

Obviously, we could see a rapid mean reversion in coffee prices as we saw earlier this year with lumber. Also, keep in mind that as appetites for the commodity have grown globally, so has the efficiency of production and distribution. But when you compare the current coffee price peak with the ones that came before, it seems as though we’re comparing prior crises that are now in the history books (stagflation and the GFC) with one that has yet to fully play out. As to how far this rally still has to go, it depends on whether current inflationary pressures are enough to make this recent hit to the global supply the perfect storm.

by Giles Coghlan, Chief Currency Analyst, HYCM

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About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East. 

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

The Dog and the Unicorn: Dogecoin and Uniswap Through a Trader’s Lens

Some History

Launched in 2018, Uniswap is a decentralised exchange built on the Ethereum blockchain. It’s a vital piece of Ethereum’s decentralised finance (DeFi) infrastructure, allowing Ethereum address holders to swap between any Ethereum-based crypto token almost instantly. Rather than the order books of traditional exchanges, Uniswap facilitates trades between different crypto assets through the use of liquidity pools that are created by users of the network. Uniswap is currently the world’s largest decentralised exchange and one of the top crypto exchanges by daily volume across the board.

Dogecoin is an older cryptocurrency that dates back to 2013. It’s based on the technology behind Litecoin (LTC) and, depending on who you ask, was either originally created to poke fun at the cryptocurrency space as a whole, particularly Bitcoin, or as an attempt to bring a much wider demographic of users into the space. Seeing as the coin has been quite successful on both fronts, the truth has somehow been lost in crypto history.

Dogecoin’s supply dynamics are radically different to Bitcoin’s. Dogecoin initially started with a 100 million hard cap, but when the last of these 100 million coins was mined back in 2015, the supply schedule was altered to allow for a further 5 billion coins to be mined each year. There is no current hard cap on dogecoin’s supply.

Technicals vs. Fundamentals

Now, from the perspective of any investor interested in fundamentals, Uniswap would seem to be the better bet. It is newer technology, built on the largest smart contract platform in the world and backed by some serious names like Andreessen Horowitz and Union Square Ventures LLC. Furthermore, it’s a systemic lynchpin in the crypto economy with an important and ground-breaking function. Below you’ll find a weekly chart of UNIUSD, not the healthiest chart in the world at the moment. It actually looks as though it may be preparing to rollover at the time of writing.

Year-to-date Uniswap is up around 200%. Dogecoin, however, is up around 2400%. Measuring from the recent market top in May, Uniswap is down some 64% to dogecoin’s 75%. All this is to say that focusing on fundamentals to the exclusion of price action at this particular point in the market cycle would have caused your portfolio to underperform.

And, if we learned anything this year throughout the WallStreetBets debacle, it’s not just about price action; sometimes the story is more powerful than anything else, particularly in the midst of a rather frothy bull market that has exceeded all expectations. Below you’ll find a weekly chart of DOGEUSD. I’m sure you’ll agree, despite there being almost no fundamental reason to hold doge over other crypto assets, it looks like a much healthier chart that appears to be getting ready to set a higher-low and make a new move higher. The chart is actually reminiscent of Ethereum’s price action in the early stages of the 2017 bull market.

The Lesson

Non-traders often find it hard to separate the asset from the price action. In other words, they can fall into the trap of paying too much attention to fundamentals at times when price action dictates almost everything. The performance of GameStop and other ticker symbols favoured by the WallStreetBets community this past year is a perfect example of this phenomenon. So, while rational onlookers shake their heads from the sidelines, the price action continues to offer the possibility for truly fantastic returns.

It happened with Tesla, long before the post-COVID trading bonanza we’ve seen, it happened with meme stocks, and it also happened with doge. It’s not just conservative traditional investors who are shaking their heads. Many crypto investors have also been sitting on the sidelines observing as the dogecoin meme massively outperforms their own thoroughly researched portfolio of crypto projects.

From a purely trading perspective, though, it’s important to remember that these symbols are just vehicles for accumulating more of your native currency; nothing more, nothing less. The best traders are able to separate their own beliefs and allegiances from what is actually driving markets and take positions that they would never dream of taking with their investor hat on.

How long will it last? That’s anyone’s guess. The point is that at this juncture the narrative is everything, and the power of retail investors to move markets by investing en masse in certain stories has been confirmed time and again this year. In a different kind of market, or even at a longer timeframe, the two charts presented above may look radically different. This is also why we want to make sure that our traders can access the most appropriate assets in any type of market.

As a global forex broker, HYCM has always offered a large range of products adapting quickly to respond to market trends and providing traders with the most in-demand instruments. In addition to cryptocurrency CFDs, HYCM offers forex, stocks, indices, commodities and ETFs with excellent trading conditions: fast execution and low spreads. The broker supports its traders every step of the way, providing regular insights on its blog, HYCM Lab, and hosting free online webinars and practical workshops. As an enduring and regulated broker, traders can rely on HYCM to provide both security and transparency.

by Giles Coghlan, Chief Currency Analyst, HYCM

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Note: Cryptocurrencies and ETFs are not available for trading under HYCM (Europe) Ltd and Henyep Capital Markets (UK) Ltd.

About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

More Selling to Come in US Equities?

This, despite positive growth expectations, with GDP expected to increase by over 6% this year, and a glowing earnings season in which almost 90% of S&P 500 companies have bested earnings expectations. The fear, however, is that the market has more than priced-in future growth expectations and that areas of it are becoming overstretched. This was most clear in the growth stocks that have already run so hot in recent months.

The S&P 500 closed down around 1%. The Dow Jones, which surged to record highs above 35,000 earlier in the session, also closed down by a fraction of a percent. This left the brunt of the sell-off to the Nasdaq stocks. The Nasdaq had its worst day since March, down around 2.5% over the day. Monday’s price action saw it dipping right to the 50-day moving average, which it failed to hold in late February, only to test it as resistance throughout most of March.

The FANG component led the sell-off; Alphabet was down 2.5%, Facebook down by over 4% following a Citigroup downgrade of the pair from “buy” to “neutral.” Earlier in the month, the Fed’s financial stability report chimed in on the above concerns, warning that a broad set of assets are vulnerable to “large and sudden declines.” While the market doesn’t seem overly concerned with imminent rate increases, it does appear to be questioning whether this equity rally is a little long in the tooth. This is evident in story stocks like Tesla and other frothier areas of the market like SPACs also taking a significant hit.

If we look a little further back, we can see that the Nasdaq led the recent sell-off. It peaked in mid-April, failed to break higher by the end of the month, and has been on a downtrend since then. During the same period, the S&P 500 had been gently grinding higher, trading mostly sideways until the rally on May 7 and sell-off on May 10.

The question remains whether this is still a sector rotation, or if these are just the first dominoes to fall. It’s an impossibly hard question to answer because you’d expect these same sectors to sell off in both a rotation and the beginning of a broader downtrend. As far as the Nasdaq is concerned, even if it fails to hold its 50-day moving average, it still has the 20-week as a historical line of support.

For more sector-specific canaries in the coal mine, we have to look to the areas of the market that have continued to outperform, despite the selling of growth and lockdown stocks. These are the pockets of US equities with uptrends that remain intact. For instance, the recent move down barely registered in the value stocks. Despite closing down around 1%, this component has yet to even set a lower low.

The same can be said of home construction, transportation, real estate, basic materials, metals & mining, energy, and even financials. All these sectors exhibit similar chart patterns, albeit some recently making new highs, while others merely rose to test their former highs. To answer the question we started with, we need to verify whether it’s just growth that’s cooling off at the moment, and to watch closely for patterns changing in any of the above sectors. It should be an interesting month.

by Giles Coghlan, Chief Currency Analyst, HYCM

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About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Pi Cycle Top Indicator Just Called the BTC Top

In fact, it’s gone up over 500% since October alone. This was the last time BTCUSD came anywhere close to testing its 20-week moving average, which has been one of the most historically reliable indicators regarding where the number one cryptocurrency currently finds itself in the market cycle.

In a bull market, it will typically remain above this 20-week moving average, testing and holding it as support as it sets higher-high after higher-low. During the bear phase, it tends to bump up against this moving average as resistance, failing to break above it as it sets lower-low after lower-high.

This past weekend saw the crossing of another milestone; bitcoin closed above $60k on the weekly chart (on some markets) for the first time in its storied history. As these new highs continue to be made on less volume and without significant follow-through and considering how far the price has already gone since mid-2020, many are starting to scout for the top.

Pi Cycle Top Indicator

In fact, an indicator that’s designed to do precisely this has just flashed a top signal for this specific bitcoin market cycle. The Pi Cycle Top Indicator uses a 111-day moving average and a 2x multiple of the 350-day moving average to predict market tops. When the 111-day moving average crosses above the 2×350-day moving average, it’s a signal that the top is in. The indicator takes its name from the fact that dividing 350 by 111 gives you 3.153, which is very close to Pi (3.142).

The image below plots the moving average crossovers mentioned above over a daily BTCUSD chart going all the way back to 2013. The vertical orange lines mark the points at which the two moving averages cross. They coincide with bitcoin’s last three peaks to within three days. On each occasion, a 60-80% correction ensued.

Pi Cycle Top Indicator plotted over daily BTCUSD chart, 2013-2021. Source: TradingView

The first two peaks on the above chart technically belong to the same bitcoin cycle as they occurred in April 2013 and November 2013, respectively. Bitcoin’s first halving event had only just taken place on November 28, 2012. Some of you will recall that the European debt crisis was in full swing during that first peak in April, specifically the bail-in of Cypriot banks. Then, the second peak marks the implosion of Mt. Gox, the biggest bitcoin exchange at the time.

It’s interesting to observe that the indicator still appears to work despite those first peaks taking place in a radically different crypto market than we have today. It misses a previous cycle top (not included in the above chart) due to there not being enough of a daily history to calculate the 2×350- day MA. As you can see on the far right of the chart, the two moving averages crossed again this past weekend. So, does this spell imminent doom for crypto holders, or will this time be different?

Back to the 20-Week Moving Average

The Pi Cycle Top Indicator is certainly compelling; however, it does conflict with what the 20-week moving average appears to be suggesting. What’s noteworthy about the moves viewed on the weekly chart below is that we’ve yet to retest the 20-week MA once since the price went parabolic in late October 2020, signalling the end of the previous bear market. As you’ll observe below, previous bull markets have used this level as a gauge of the ongoing health of the rally, routinely taking profits down to it and then riding it up as support.

Weekly chart of BTCUSD with 20-period moving average. Source: TradingView

This is most noticeable in the extended rally we witnessed from 2016 to 2017. The price action retested that 20-week MA at least five times before surging on to its then all-time high at around $20k. From this perspective, the move looks like it’s only just getting started. Keep in mind that each week that goes by without significant consolidation sees the weekly MA rising even further, providing a higher cushion, if you will. It’s currently above $40k.

To Wrap Up

The fundamental picture is the same kind of thing we’re hearing in US equities. Stocks are overvalued, we’re seeing all sorts of technical divergences, but the broader macro picture suggests that they have further to go, and no one is willing to call a top just yet. Those same factors are also supporting crypto prices. Regardless of whether the Pi Cycle Top Indicator has it right or not, it’s still a long way down to that 20-week MA, and that would favour further upside for now.

by Giles Coghlan, Chief Currency Analyst, HYCM

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Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and Henyep Capital Markets (UK) Ltd.

About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

EUR/USD Between a Rock and a Hard Place

The dominant narrative thus far has been that of the reflation trade, complete with expectations of dollar weakness into and throughout 2021. This saw the euro appreciating against the US dollar by more than 16% between its lows last March and the highs it set early in January before retracing.

Weekly EURUSD chart. Source: TradingView 

However, any slight shift in sentiment from that strong reflation trade narrative is being felt across the asset spectrum. We’re seeing this in US equities, with the recent sell-off affecting Russell 2000 stocks in a much more pronounced manner than the tech names of the Nasdaq. We’ve also observed it in the recent bout of profit-taking in crude oil that saw it dipping below the 20-day moving average for the first time since November. All this has contributed to dollar strength and perhaps most notably to the first break below the 20-week moving average in the EURUSD pair earlier this month since all the way back to the depths of the Covid crash last March.

What’s Weighing on the Euro

The euro’s upward march against the greenback is being stifled by a number of factors besides the shifting sentiment around the consensus of global reflation. For one, Europe is lagging behind both the United States and the United Kingdom in its ability to mass vaccinate the populations of its individual member nations. This due to a combination of vaccine skepticism, shortages and concerns over the British-Swedish AstraZeneca vaccine. Hungary, which currently boasts the most successful vaccination roll-out in Europe, has resorted to importing the Russian Sputnik V vaccine, despite it not yet being approved for use in Europe.

Furthermore, the distressing possibility of a third wave of coronavirus infections appears to be turning into a reality, with the seven-day incidence rate in Europe having jumped by 40% since February. It now appears that France, Italy and Germany will all be entering strict Easter lockdowns in order to curb the spread of the virus.

Beyond the pandemic, Turkish President Erdogan’s recent sacking of central bank president Naci Agbal, his third such firing in two years, has caused the Turkish lira to tumble yet again. This too, has important knock-on effects for Europe. Firstly, it impedes Turkey’s ability to repay European banks, which are among Turkey’s debtors. Second, a falling lira diminishes the purchasing power of the Turkish populace, and with it their appetites for imported goods from its European trading partners, which it has historically stronger ties with than the United States.

A Return to Dollar Strength?

A risk-off mood, hastened, as we mentioned above, by the sheer overcrowding of the reflation trade, is leading to a return of dollar strength. You can view this in a purely technical light, with investors booking their profits from everything reflation in US dollars. Whether it be the outsized gains of US equities, or the surge in commodity prices we’ve been witnessing, you can understand the urge to take some profits off the table at these highs.

Then there are the many fundamental reasons for them wanting to hedge against the consensus of reflation, particularly with Europe’s own recovery now starting to look a quite shaky. These alone account for some of the strength in the greenback we’ve been witnessing of late. Add to this Jerome Powell’s recent failure to allay the market’s fears over rising bond yields, as well as Janet Yellen’s recent testimony to US lawmakers where she hinted that “some revenue raisers” (which the market has read as tax hikes) would be required to offset the cost of the Biden administration’s forthcoming $3 trillion infrastructure spending plan, and you can see why US dollars are starting to look like a good bet for many investors.

Technically Speaking

EURUSD has been gearing up to retest the recent lows it set at 1.183 on March 9. March 23 saw it returning to those lows after a failed break above 1.198 on March 11 and March 17. We’ve been observing the same action mirrored in the DXY, with a retest of 92.5 after a failure to close below 91.35. And again, in the EXY as it returns to test 118.4after failing to break beyond 119.9.

4-hour EURUSD chart. Source: TradingView

At the time of writing, that EXY level at 118.4 has yet to break, however, the opening of the European trading session on March 24 has seen the euro breaking below 1.183. Whether this is a temporary fake-out remains to be seen. Those of you observing RSI levels will be interested to note that a 4-hour divergence is forming between the price action and RSI. RSI dipped to 19.59 on March 9 when EURUSD dropped to 1.183 and is now sitting around 29.7 despite the price having made a lower-low at 1.182. This could be evidence that the move down is showing signs of losing strength, which could lead to a bounce from here. However, the broader market outlook remains bearish for EURUSD so even in the event of a bounce, keep an eye out for a lower-high below 1.194 to be set from here.

by Giles Coghlan, Chief Currency Analyst, HYCM

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About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Will 2021 Be Another Historic Year for Crypto?

We’ve also seen the market cap of the entire crypto space breaking above $1 trillion for the first time ever. Having covered the entire run-up since the end of the bear market, it’s been fascinating to observe these shifts in sentiment.

4-Hour Chart of Total Crypto Market Cap. Source: TradingView 

Aversion Gives Way to Appetite

The crash of 2018, followed by the coronavirus sell-off last year in March, weighed heavily on investor confidence. Each new high was met with expectations of an imminent sell-off. Remember that the asset was already looking overbought before it broke its 2017 highs at the close of 2020. As bitcoin traded closer to those highs, many expected a prolonged correction because it had already rallied by almost 200% in 2020 alone, and this sentiment was held despite coronavirus.

However, as we learned back in 2017, expectations are easily confounded when animal spirits are woken in crypto. We’re barely into the first half of January and bitcoin has doubled again, trading as high as $42,000 on January 8. Over the past weekend, we’ve seen profit-taking as traders hunt for a top. At the time of writing, the price has dipped as low as $32,600.

So, where to next?

As much as the entire market has already run, there are a number of factors possibly converging to support higher crypto prices. What’s notable about the shift in sentiment is that it seems to be remaining positive, even at these inflated prices. It’s worth noting that even as recently 2019, there were nowhere near as many institutional traders publicly discussing bitcoin, making price predictions, or allocating a percentage of their capital to it. Bitcoin seems to have become a part of the broader reflation narrative that sees 2021 ushering in a commodity bull cycle and a cheaper dollar, both of which should be positive for crypto assets.

All this is happening while bitcoin itself is at a very bullish part of its own internal cycle. The “halvening” event, where the number of new bitcoins minted per block is cut in half, takes place every four years and the last one almost went by unnoticed with coronavirus dominating the headlines throughout 2020. Now, with less supply and more interest from institutional and retail alike, we could be at a crucial turning point in the asset’s history. In November, it was reported that PayPal and Square’s CashApp alone, had been scooping up 100% of all newly minted bitcoins, and that’s just for the retail crowd.

Then there’s the amount of fiscal and monetary stimulus that’s already been conducted globally, and all that’s to transpire due to COVID-19 still not firmly in the rearview. The debate as to whether or not inflation is here due to unprecedented central bank largesse is moot when you’re trying to purchase anything that cannot be “eased.” Hard assets like gold, bitcoin, and even industrial metals like copper, have undoubtedly inflated since last year. So, with more printing on the cards, there will be more money vying for the same scarce assets.

How to handle it

If you’re new to the crypto space, keep in mind that it’s a highly volatile asset class and the experience of trading it with no leverage at all is similar to using leverage on less volatile markets like FX. For this reason alone, be very judicious in your use of leverage (if any) when trading crypto. If you’re completely new to trading as a whole, it is best to use no leverage at all. This will help you avoid large losses of capital as you learn how to trade, and is critical in many traders’ long-term ability to stay in the markets.

For those of you with both a basic grasp of trading and crypto markets, it pays to remember that a rising tide lifts all boats, so inflated bitcoin prices eventually spill over into the rest of the crypto market. Some of you will be holding bitcoin all the way up, others will attempt to capitalise on short- and medium-term corrections. For those wanting to trade the chop, a rudimentary understanding of technical analysis will stand you in good stead.

The more ambitious among you who are considering venturing into the other cryptocurrencies should be aware that there’s a relationship between bitcoin and the rest of the “altcoin” market that needs to be researched and understood. If past is prologue, investing in the strongest of the “alts” at the right point of the cycle can lead to trades that outperform bitcoin itself. In 2017, it was all about ether. It may be the same story in 2021-2022, however, there are a few notable contenders out there in the smart contract vertical who are bringing some interesting technologies to market. These should be researched and understood by anyone seeking to trade the altcoin market in 2021.

by Giles Coghlan, Chief Currency Analyst, HYCM

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Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and Henyep Capital Markets (UK) Ltd.


About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East. 

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Bitcoin’s Back! Is a New Crypto Bull Market Upon Us?

Not only has it been tightly contested, but it’s also been rife with controversy and intrigue. Market reactions have been interesting, with stocks surging gleefully at the prospect of political gridlock, with a Democrat President and Republican senate possibly translating to no policy-related surprises for the foreseeable future. However, it is Bitcoin that’s had perhaps the most noteworthy reaction and currently finds itself perched at a level that demands further discussion and analysis. In this article, we’ll take stock of where bitcoin currently stands and explain why this is an extremely crucial moment in its history.

4-Hour

Looking at bitcoin on a shorter-term timeframe, we can see how the leading cryptocurrency has performed during this past election week. Since November 3, we’ve seen bitcoin going from around $13,386 to a high just shy of $16,000 on November 6. The following day saw it ranging sideways before selling off in the evening. On November 8, it fell below $15,000 to reach a low of around $14,355. It has since reclaimed that all-important $15,000 level to trade at around $15,385 at the time of writing. This price action at the 4-hour timeframe, though significant, obscures the historical relevance of the price levels we currently find ourselves at.

4-hour chart of bitcoin, priced in USD. Source: TradingView.

Daily

Zooming out to the daily chart reveals a few more notable details that should clue you in to the importance of this most recent move. As you can see below, the last time bitcoin made a run that attempted to challenge its former all-time highs was in the summer of 2019. 2019 saw bitcoin emerging from a pronounced bear market.

By December of 2019, it had lost around 84% of its value, trading at just over $3,000. In 2019, it proceeded to take out all but a handful of lower-highs, kissing the $14,000 level before retracing back to around $6,500 by the end of the year. A January rally at the start of 2020 would see it breaching the $10,000 level before COVID-19 became a reality, and the rest is coronavirus history. Like all other asset classes, crypto would also endure a momentous pandemic-inspired sell-off before spending the rest of the year slowly and steadily reclaiming lost ground.

Daily chart of bitcoin priced in USD. Source: TradingView.

Weekly

Zooming out even further, to the weekly timeframe, reveals even more of bitcoin’s historical price action and puts these recent moves into context. Election week saw bitcoin closing at around $15,500 on the weekly. As you can see from the chart below, this last weekly candle represents a weekly close above $15,000 for the first time in almost two years. Not just that, it also means that in bitcoin’s entire trading history, bitcoin has only closed higher than this November 2 candle twice.

The week of December 11, 2017, saw it closing at around $18,950. The week of January 1, 2018, saw it setting a lower-high at around $16,160. Why is this relevant? As you’ll see below when we look at the monthly chart, we’re approaching levels at which there isn’t much prior price action. This means that the vast majority of bitcoin trades that have ever been made are currently sitting in profit, with only those who bought in at the very top left still in the red.

Weekly chart of bitcoin priced in USD. Source: TradingView.

Monthly

Monthly chart of bitcoin priced in USD. Source: TradingView.

The monthly chart clues us into a few more insights that traders and investors alike ought to be aware of. As you can see below, back in 2017, the blow-off top of bitcoin’s epic bull run lasted less than a month. This is why, despite reaching as high as 20k in mid-December 2017, it had come back down to below 14k by the end of the month.

Why is this important? Because it means that at the end of October 2020, bitcoin’s monthly price chart closed at almost precisely the same level as it did back in 2017. In other words, there are now no monthly closes in bitcoin’s entire history that are higher than where it’s currently trading. To paraphrase this once more, if November’s candle closes above $13,800, it will be the highest monthly close in bitcoin’s short but highly eventful trading history.

What does it all mean?

What it means, is that the higher the price goes and the longer it remains at these levels, the less resistance there is from traders trying to cash out of unprofitable positions. Additionally, the more confidence traders and investors will have that this isn’t the top of a bubble about to burst, but rather the beginning of a much more significant move higher. The reason prices can surge higher once an all-time high is breached, particularly in an asset as volatile as bitcoin, is that the proverbial “blue sky breakout” has no previous price action to constrain it. Prices can greatly overshoot following a break above an all-time high before price discovery tempers animal spirits and consolidation sets in.

Finally, and perhaps most significantly, Bitcoin, the cryptocurrency space as a whole, and indeed the entire global economy, find themselves in a radically different world than they did back in 2017. Firstly, there are now many institutional on-ramps, allowing much larger investors to purchase and hold crypto. Secondly, the global economy was in a far less precarious position in 2017 than it is now in this post-COVID world.

Thirdly, bitcoin’s deflationary nature and proven ability to securely hold value become more enticing as time goes on, particularly in a financial world where there don’t seem to be many sea-worthy escape rafts. Lastly, at less than $250 billion, bitcoin’s current market cap is still much lower than gold’s and even smaller than all of the individual FAANG stocks, except Netflix.

by Giles Coghlan, Chief Currency Analyst, HYCM

Trade with HYCM

Note: Cryptocurrencies are not available for trading under HYCM (Europe) Ltd and Henyep Capital Markets (UK) Ltd.


About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East. 

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Could the DXY be Set to Move Higher as Election Night Approaches?

In less than a month, perhaps one of the most hotly contested and acrimonious presidential elections in recent memory is due to be held during a global pandemic and against a backdrop of civil unrest. On November 3, President Donald Trump will seek to maintain his grip on the reins of power for another four years as Democratic nominee Joe Biden hopes to unseat him.

A look back to 2016

What will this mean for the markets? It’s still anyone’s guess, but looking back to 2016’s election can perhaps provide us with an insight as to what may be in store. Some of you may remember that the recent bout of dollar strength we saw earlier this year at the height of the coronavirus crisis has only been eclipsed once this past decade. In mid-March, the DXY breached the 100 level to top out at around 103 by the end of the month. The last time the dollar rallied as hard was in the wake of the 2016 election following President Trump’s victory, where it topped out just shy of 104. To get anywhere near to those levels prior to that, you have to go all the way back to the end of 2002.

Weekly Chart of DXY going back to 2016. Source: Trading View.

Those of you following US equities back in 2016, will also recall what, at the time, seemed like a worrying sell-off, which hindsight has revealed to be a mere blip as markets shook off the shock of a Trump victory and promptly rallied to new highs. So, we had the risk-off combination of a dollar rally and equity sell-off until markets came to terms with the fact that the sky was not indeed falling, and that the new commander-in-chief may just be good for business. But will this time be as cut and dried?

A much more volatile 2020

As you can appreciate, what we have now is a much more volatile situation. What we’ve seen in the US since March is a V-shaped recovery in equities combined with a downturn in dollar strength. The US dollar index hit lows of 91.70 at the beginning of September and has been coiled up in a range between 91 and 94 since July. The S&P 500 is currently trading around 58% higher than it was at the lows in March (also up some 70% since the November 2016 sell-off during the last presidential election).

Meanwhile, the situation on the ground for your average American couldn’t be starker. US unemployment throughout 2016 hovered at around 4.5 million, while it currently finds itself at 7.9 million, having fallen from a staggering 14.7 million back in April. Despite resounding calls for more fiscal stimulus, the package of unemployment benefits known as the Cares Act was brought to a xclose at the end of July and now appears to be off the agenda until after the election.

US unemployment data 2016-2020.

The United States and its population finds itself in a much more precarious situation in 2020 than it did in 2016. Aside from the economic consequences of COVID-19 and a cyclical downturn that seemed to be on the cards from back in 2018, recent events have revealed it to be more polarized along ideological, racial and generational lines. Even something as seemingly objective as the science behind pandemics and how to stem their spread has become a highly politicised issue.

Markets haven’t priced in a chaotic election

But it’s the election itself that has market participants most concerned, with some fearing that a contested election result could result in nationwide disruption and market chaos. The distinctly uncollegiate first debate between Biden and Trump, in which neither candidate seemed willing to advise their more militant followers to stand down should a conclusive victor not emerge on the night, seemed to provide a confirmation of these concerns.

There has been a great rise in the casting of postal ballots due to changes in the law since 2016 to allow for, or expand, early voting by mail in certain states. These changes, coupled with the pandemic, mean that a certain contingent of voters (which skew slightly Democrat) have been casting their votes a month before the election. The manner in which postal ballots are processed makes it increasingly likely that a clear victor will not be announced on the night or even the morning after November 3.

This is particularly so if the numbers are close. In the event of anything other than a landslide for either candidate, we could see a situation in which Trump or Biden could refuse to concede defeat. Indeed, it has been reported that former presidential candidate, Hillary Clinton, has advised Biden to do just this and not concede on the night until all of the postal ballots are counted.

With US stock markets at or around their all-time highs and the DXY trading at 2-year lows, it’s becoming clear that markets have yet to fully price in the possibility that this election may not run as smoothly or be resolved as conclusively as the previous one was; and that’s despite the fact that Trump’s 2016 victory was something of a wild card that markets failed to foresee. The moral of the story?

Expect volatility to rise as the election draws near, and be prepared for surprises. Incidentally, this is true even if you don’t trade the dollar or equities. Even assets, like cryptocurrencies, which are usually removed from the above concerns, are likely to be shaken should we experience a messy and chaotic presidential election. Also, be aware that, excluding 2008, the US dollar has risen between 2% and 12% every year following a presidential election since 1980.

by Giles Coghlan, Chief Currency Analyst, HYCM

Trade with HYCM


About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East. 

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Is Gold About to Move Higher?

This latest bout of dollar weakness can be thought of as positive for the yellow metal, whereas the recent gains in US equities have been hinting at a possible, though tentative, return to “risk-on” which ought to be weighing on gold prices. Speculation as to a possible COVID-19 vaccine has certainly lifted animal spirits, which could be negative for gold prices. An effective vaccine would not only be good news for the pharmaceutical industry, but also for the global economy as a whole. It could be the first step to a possible return to normality for all manner of businesses that have been hit hard by the pandemic and resultant lockdown measures.

But then, we also have the looming US presidential election and all the uncertainty surrounding it. It would seem that the United States is caught between the political rock and hard place of Trump and Biden, both being candidates that vast swathes of the US populace have strong reasons for not wanting as their commander-in-chief. Many are expecting further upheavals following the election, particularly if Trump ends up being victorious. Add to this the surges in European COVID-19 cases as the virus begins to rear its ugly head again in places like France and Spain, and you can understand why this quintessential safe-haven asset seems to be pulling in different directions.

A look at the technicals

Monday the 14th, saw gold futures climbing to book their largest increase for the month. Gold appeared to be forming a symmetrical triangle after the precious metal broke through the fabled $2000 level in early August and then promptly retraced all the way back down to $1862. Keep in mind that in contrast with descending triangles, which have a downward bias, and ascending triangles, which have an upward bias, symmetrical triangles have no bias at all. This means that the price is just as likely to break bullish as it is to break bearish. Evidently the technicals are also reflecting the general state of uncertainty that markets seem to be characterised by of late.

As you can see in the chart below, gold’s recent surge to new highs appeared to be running out of steam as market participants took profits and the price action cooled following a 14-day run that saw the price climbing from just under $1800 on July 17, to an all-time-high $2075 on August 6. This cool-off was anticipated by the RSI divergence we saw on the last leg of gold’s most recent surge higher. When RSI levels diverge from price action (in this case forming a lower-high as the price action forms a higher-high), it is an indication that the rally is possibly running out of steam.

Why is the above interesting? Because of just how overbought gold recently was. Had this most recent high been the peak of gold’s move up, you would have expected a more pronounced sell-off, possibly followed by the formation of a descending triangle as each subsequent bounce fails to break the previous high. Instead, what we’ve seen is a consolidation pattern that seems to be suggesting a further build-up of pent-up energy and a possible move higher. Another thing to be aware of is that this recent break of the $2000 level wasn’t just a huge psychological milestone; it was also momentous from a technical standpoint.

Again, if we look at the RSI levels we can observe that the last time gold’s RSI was so overbought on the daily chart was way back in September of 1999 (see below). That’s when gold rallied from $253 to $338 in less than a month as the dot-com bubble approached its height.

Far from being a local top, the rally gold experienced back in 1999 was just the beginning of an extended bull market that would see it rising steadily until its $1900 peak back in 2011, following the Global Financial Crisis. That’s not to say that we’re bound to see a repeat performance, however, there are similarities. Many believe that gold has to be repriced to reflect the unprecedented monetary expansion we’ve seen in recent years, as well as the general inflation of other assets, from stocks and property, all the way to market newcomers such as cryptocurrencies.

To buy or not to buy?

This remains the question on everyone’s lips. On the one hand, gold has already performed so well since 2018, suggesting that a more pronounced pullback may be in store. On the other, the factors supporting gold prices have only been increasing as outlined above. Long-term, there’s a lot to suggest that even at these levels gold could be a solid investment. Short-term, it’s anyone’s guess. However, as far as the recent price action is concerned, we’ve seen a successful retest of the $1800 level, consolidation, and as you will see below, a bullish break of that aforementioned symmetrical triangle. All of which are strong bullish signals.

Keep in mind that triangles are just a guide, and they can be highly vulnerable to fakeouts. The price can break out of a triangle for several candles, only to reverse course and carry on moving in the opposite direction. What we need now, in order for the bull case to be confirmed on the shorter timeframes, is a break above $1993. This is the last lower-high gold set on the 4-hour chart. After that, the next price level to watch is $2015, and finally the recent all-time-high of $2074.

By Giles Coghlan, Chief Currency Analyst, HYCM

Trade with HYCM


About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Is It Make or Break for the US Dollar Index?

You’d be hard-pressed to find another ticker with as many contradictory views as the DXY. The dollar has such an enormous influence over the global economy that it’s almost impossible to arrive at a consensus as to what it’s doing, why, and where it’s going. In this article, we will look at some of the facts that the bulls and bears are drawing attention to in order to make their respective cases.

The Bears Say:

The upcoming US elections are negative for the dollar’s mid-term prospects. With Democratic candidate Joe Biden currently leading the polls over President Trump in several key states, many are viewing a potential Biden presidency as a threat to a range of policies that have been favourable to Wall Street. As the elections draw nearer, there’s a possibility that investors could be looking to the euro or the yen as an alternative, at least until the dust settles.

The tentative truce in US-China tensions has been almost completely undone since the global spread of the coronavirus pandemic. President Trump has been ratcheting up hostilities between the US and China as he continues to play the blame game. What started out as tit for tat finger-pointing and flight restrictions between the two superpowers has escalated to Trump threatening a ban on the Chinese-owned TikTok and WeChat apps within the United States.

The President is also reportedly offering tax benefits, encouraging US firms to move their factories out of China. When the US-China tensions first escalated in earnest after President Trump began imposing tariffs and other trade restrictions on Chinese goods in 2018, the US Dollar Index fell to its lowest levels since 2014. It is now trading just over 4% above those former lows.

On the technical side of things, the end of July saw the DXY breaking below an important ascending line of support that has held firm for 9 years. It held firm when the index previously bottomed out in 2011, 2014, and 2018. The loss of this long-term support level is a highly ominous sign for technical traders, especially since the DXY has continued to drop below that line in August without so much of a sign of rebounding to retest it as resistance.

In the week of August 11th, the CFTC reported that USD net shorts had increased by a further $3.2 billion to an incredible $32 billion. This is the largest bet against the US dollar that we have seen since 2011.

Add to this a botched coronavirus response, a number of key frailties that the crisis has highlighted in the US economy, and the unprecedented monetary expansion that the Federal Reserve has been forced to conduct in response to the crisis, and you can see the bear case continuing to grow ever stronger.

The Bulls Say:

As far as Wall Street fears over a Biden Presidency are concerned, his pick of Kamala Harris as running mate is a move to appease both Wall Street and Silicon Valley. Kamala Harris is viewed as the moderate choice among a number of other more left-leaning candidates. Her pick, which has been praised by Hillary Clinton, is broadly viewed as being good for business-as-usual. She has been reluctant to support policies such as the breakup of the big tech companies and Medicare for all.

In her time as Attorney General of California, she scuppered the overturning of the death penalty. All the above put her squarely at odds with the more radical policies of other Democrats, as well as the protest movement that has been sweeping through the US this year. Add to this the mounting fears that Biden’s age and evident cognitive decline will not allow him to see his term through if elected, and you have the possibility of Harris taking the reins until the next election and then running again in 2024.

The enormous number of US dollar shorts recently reported by the CFTC (the highest number since May 2011) can certainly be taken as a bearish sign; alternatively, they can be read as an indication that the dollar is, in fact, reaching a bottom. If 2011 is anything to go by, the flurry of shorts seen in May of that year was followed by the DXY bottoming-out and then surging from around 74 to 84. For some investors, the overwhelming number of US dollar shorts is a sign of the laggards piling in just as the move down becomes overextended, which can mean that a reversal is imminent.

While the break below that aforementioned ascending support line doesn’t bode well for the dollar from a technical standpoint, it overlooks the fact that the euro is very overbought at the moment. The last time the Euro Currency Index saw weekly RSI levels this high was back in January 2018 (which was followed by a pronounced multi-year downturn). Additionally, the DXY’s RSI is currently as oversold as it has been since January 2018.

In fact, if you switch to the daily chart you’ll notice that the DXY is looking like it may be entering what appears like a bullish divergence (price making new lows while an oscillator like RSI fails to do so), while the Euro Currency Index appears to be doing the opposite; indicating a bearish divergence (price making new highs while RSI fails to do so). This is also a possible indication of a reversal of fortunes for both EUR and USD.

Finally, it seems as though we’re in a radically different situation today than when we witnessed dollar weakness during previous cycles. China is not embarking on any significant bouts of infrastructure spending. Emerging markets are unlikely to see a massive surge to strength any time soon as they deal with both the economic fallout of the coronavirus on commodity demand, as well as the spread of the virus itself within their borders. And with both Europe and Japan in the midst of their own deflationary spirals, this may be as good as it gets for the dollar bears. Watch this space.

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

by Giles Coghlan, Chief Currency Analyst at HYCM

Trade with HYCM


High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

What’s Next for Gold? 3 Important Tail Winds

These pre-coronavirus concerns have only been exacerbated further by the onset of the pandemic this year, as well as the economic consequences of the virus itself and the differing responses to it across the globe.

Recently, we’ve seen gold break through the two solid resistance levels of $1750 and $1790, respectively. $1750 is a level that goes all the way back to 2012 and $1790 halted gold’s upward path in both 2011 and 2012. After gold futures broke above $1800 earlier in the month, the spot market followed suit, sending the precious metal to highs last seen 9 years ago. So what’s likely to be next for gold? Are we getting toppy at these levels or do we have further to run?

ETFs

Gold ETFs remain one of the best ways for risk-averse investors such as insurance companies and pension funds to allocate their capital to this safe-haven asset. With interest rates coming down to the zero bound in developed countries and bond yields dropping, gold ETF allocations have been on the rise. Last month it was reported that, in May, gold-backed ETFs registered inflows of gold totalling 33.7 billion in dollars, the largest since the last all-time high of $24 billion in 2016. And that’s only 5 months into the current year.

Some of the reasons given for this surge of interest include all the usual suspects of ballooning central bank balance sheets, economic uncertainty, trade tensions and continued concerns over COVID-19. However, gold’s steady uptrend during both rising stock markets and rising bond markets is revealing an interest in the yellow metal in both risk-on and risk-off environments. Keep in mind that as more capital flows into these gold-backed ETFs, their gold holdings also necessarily increase, causing them to have to buy more gold at higher prices.

Production Disruptions

You would expect an unprecedented lockdown like the one we recently experienced to cause a massive drag on demand across the board. Gold jewellery has been no exception. Its sale has been down throughout the pandemic in countries like China and India, which have traditionally been large retail markets. However, this has more than been made up for by safe-haven capital inflows from the developing world.

Many gold miners now find themselves watching demand increasing while their operations experience significant disruptions due to the pandemic. Last month it was estimated by Wood Mackenzie that in order to maintain 2019 production levels, the gold industry would have to invest $37 billion into roughly 44 new projects by 2025. With virus hotspots having recently moved from Europe to the developing world, countries like Brazil, Chile and Peru have to contend with soaring infection rates and measures that are impeding the running of their existing mines, as demand for the precious metal increases.

Unresolved Risks

Have the risks that led to gold’s recent rise been resolved in any way? This is a key question. Part of golds recent performance has to be put down to perceived monetary risks. Fear of central banks printing large amounts of new money and debasing their national currencies, as well as fear surrounding the idea of “lower for longer” where interest rates are concerned. Have these specific fears been put to bed? The answer would have to be a decisive no.

How about the perceived fiscal risks of government debt, deficit-spending and the like? We’re now just over half a year into this coronavirus pandemic and are still hitting daily records for new infections. A significant portion of the global workforce finds itself out of work, and there are increasing fears of corporate bankruptcies on the horizon. All of which is likely to take a toll on government balance sheets as they are forced to step in and provide economic buffers for their populations.

What about the geopolitical risks? Have these lessened in 2020, or have they increased and become even more unpredictable? We’ve recently seen skirmishes between India and China along a border shared by the two countries as well as a complex of trade tensions between China and a number of nations including the United States, Australia and India. Add to this the local problems each nation is facing and you have to believe that geopolitical risks have increased in 2020, making the world of 2019 look like a far simpler one. All of the above suggests that rather than easing, the fears that have led to gold’s rise, as well as the uncertainty for the future, have only strengthened.

Final Thoughts

While the US stock market continues to confound the bears and a race takes place between market euphoria and growing coronavirus cases, gold’s price has been going from strength to strength. From a technical perspective, traders are undoubtedly looking at +$1800 gold prices for signs that gold is overbought. However, it would seem that only three resistance levels now remain before a blue sky breakout. These levels are $1850, $1881 and $1919, all three of which were tested within a period of 5 weeks back in 2011.

So, what ways are there to play a market that has already gone up some 15% in this year alone?

Last month, Goldman Sachs increased its 3-, 6-, and 12-month forecasts on gold. It upped them from $1600, $1650, and $1800 to $1800, $1900 and $2000 respectively. Also recently, famed bitcoin evangelist and cryptocurrency hedge fund manager, Mike Novogratz, advised people to own more gold than bitcoin, saying: “My sense is that bitcoin outperforms it, but I would tell people to have less bitcoin than they do gold just because of the volatility.”

For those not wishing to trade this market, it would appear that the consensus is that gold has to rise from here, regardless of how much it has already risen since 2018. A buy and hold strategy may make sense for this group. For those wishing to actively trade gold, keep a close eye on any break above the former all-time high. When assets break to new highs they can run much higher than many expect as there is no previous price action to go on. For those of you who are more conservative, look for a re-test of $1800 on the way down to hold as support.

by Giles Coghlan, Chief Currency Analyst at HYCM

Trade with HYCM


High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

From Lockdown to Riots: Why Our Next Steps Are Crucial to the Future

by Giles Coghlan, Chief Currency Analyst at HYCM

From the unexpected election of President Trump to the results of the Brexit referendum to the gilets jaunes in France and the rise of right-wing populist movements in Europe and beyond.

As 2019 gave way to 2020, we saw headlines about trade war and recession being replaced by headlines about the coronavirus epidemic, the initial breakdown in sense-making across the globe regarding how to handle it, the incredible market shocks that followed, and a tentative calm before the next storm as countries gradually opened up and citizens tried to get back to normal. Then, the recent tragic killing of George Floyd at the hands of the Minneapolis police department ignited protests, civil unrest and riots that refused to remain local, spreading not just across the United States, but across the entire world.

But what do all of these radically different events and causes have in common? And why does it increasingly seem like the world is a powder keg awaiting a willing match to ignite it? According to the Global Peace Index for 2020, a yearly survey put together by the Institute for Economics and Peace (IEP), civil unrest has doubled since 2011, with a total of 96 countries having experienced violent demonstrations in 2019.

The report highlights that this trend is likely to continue with increased political instability being on the cards, as well as worsening “international relations, conflict, civil rights and violence, undoing many years of socio-economic development.”; all of this due, in part, to the economic fallout from COVID-19.

2008: The scar that never healed

Ordinary people watched in astonishment in the wake of the Great Financial Crisis as the banks responsible for the crisis were bailed out with taxpayer money, and austerity policies were widely inflicted on populations in order to ease the global economy out of the crisis and avoid a complete financial meltdown.

A 2018 study by the Organisation for Economic Cooperation and Development (OECD) found that wealth inequality had increased in both the United States and the United Kingdom since the Great Recession. The changes were put down to a combination of factors, which included “falling house prices in the aftermath of the crisis, lower rates of home ownership, and higher prices of financial assets in the recovery benefiting those at the top of distribution.”

These last two points are important to keep in mind. Financial crises can be opportunities for those at the bottom of the ladder to gain access to assets that were beyond their reach prior to the crash. This includes both securities and property. In the aftermath of 2008, this did not take place. The accommodative policies of central banks across the globe saw money that was meant to spur growth disproportionately benefiting the wealthy by entering the shadow banking system and inflating property prices from their lows. In fact, in the US, home ownership among millennials has been shown to have declined by 20% between 2009 and 2019.

If anything, the 2008 crisis has consolidated wealth in the hands of older generations (those who held it prior to 2008) and has hindered younger generations from gaining access to it. When the boomer generation (born between 1946 and 1964) were roughly the same age as the millennial generation is now (born between 1981 and 1996), they owned around 21% of America’s wealth, millennials currently own around 3%.

The OECD report found similar trends in other countries. “During the financial crisis and in its immediate aftermath, mean household wealth fell considerably for households with heads under the age of 35 in Australia, the United Kingdom and Italy, while it rose in real terms in these same countries for households with heads aged 65 or older.”

The trend is perhaps even clearer when you zoom further out to the richest among us. At the beginning of 2019, Oxfam released a report to coincide with the World Economic Forum in Davos showing that the number of billionaires who own as many assets as half of the world’s population fell from 43 in 2017, to 26 in 2018. Please read that statistic again.

What’s it got to do with COVID?

In short, everything. In this most recent case of civil disobedience, the eruption of public sentiment had to do with race inequality and yet another instance of abuse of police power. In Lebanon, October’s demonstrations were sparked by a proposed tax on calls made through WhatsApp. In Chile, they had to do with a hike in subway fares. In France, it was fuel taxes. In Hong Kong, Chinese overreach. However, what unites all of these demonstrations is a general mood of distrust in institutions, politicians, and business as usual.

As the protests over George Floyd’s death morphed into riots and spread across the United States and then overseas, the Nasdaq was busy recording an all-time high, breaking February’s former high on June 5th and then going on to close above 10,000 for the first time in its history on June 9th. This, despite 1 in 7 Americans being unable to find work as of May 2020, which is the highest level of unemployment Americans have experienced since the Great Depression.

Of course, the Nasdaq is heavily weighted towards information technology stocks, which goes some way to explaining this complete dislocation between its performance and conditions on the ground. However, we’ve also seen the S&P 500 recently breaking above its 62% retracement level, which has historically acted as a significant point of resistance during many of the largest bear market bounces in history, including the DOW in 1929.

If there’s a theme to any of this, it’s consolidation across the board. The largest 5 US stocks (Amazon, Apple, Facebook, Google, and Microsoft) now account for around a fifth of the entire S&P market cap, a larger percentage, even, that the top 5 did during the Dotcom bubble.

Like 2008, the coronavirus crisis has provided the world with another unexpected systemic shock, albeit of a different variety. The manner in which we manage our way out of this new crisis could be the deciding factor as to whether the future will hold more civil unrest and widespread distrust in institutions (and the democratic method), or whether we can go some way to healing the wounds that were inflicted post-2008 which have just been ripped open again. If the measures we collectively adopt to get ourselves out of this crisis continue to consolidate power and wealth in the hands of the few, leaving the rest – particularly the young – on the outside looking in, then the recent bouts of rioting we’ve seen could just be getting started.

Trade with HYCM

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose.

Please think carefully about whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Three Different Emerging Market Responses to the Coronavirus Crisis

This has been due to massively curbed global demand for commodities and extreme dollar strength; a deadly combination for countries that are heavily reliant on global demand and whose cratering currencies now leave them unable stockto service their dollar debts. With the MSCI Emerging Markets Index down by around 20% year-to-date, and EM currencies down anywhere between 10-40% against the dollar, many are wondering how much further down they have to go.

China

China is over-represented in the MSCI Emerging Markets Index, accounting for around 33% of its value. This goes some way to explaining the rebound we’ve seen in the broader index since the multi-year lows it set back in March. At the time it was down by some 34% year-to-date.

China was the first country into the crisis and is looking as though it may be the first country out. 5 million people found themselves out of work in the first two months of the year alone. The country’s official manufacturing PMI dropped to record lows of 40 in February, as did its services PMI, falling to an unprecedented 26.5 in the same month.

Having implemented aggressive testing, tracking and social distancing policies, the country has been able to slow the virus’s spread and to gradually encourage its citizens to return to work. In March, both measures recovered sharply, with the manufacturing PMI coming in at 50.1 and services PMI at 43. While manufacturing appeared to have barely scraped into expansion territory, April’s reading saw it dipping below 50 again, with a reading of 49.4. China’s services economy is also still in contraction, with April’s reading coming in at 44.4.

It pays to remember that China’s economy has changed a lot since the mid-2000s when manufacturing was the single greatest contributor to its GDP. Services now account for over 50% of the country’s GDP, which is more than manufacturing accounted for at its highs. For this reason, China’s recovery may not be as simple as just opening up its factories again and getting back to work. Its manufacturing sector has done well to pick up the slack in supply, but it will require ongoing demand from a global economy that’s still struggling to deal with COVID-19. The country’s muted service sectors tell a story of reduced domestic demand, deferred big-ticket purchases, and a general sense of wait-and-see from the consumer.

Latin America

An emerging market narrative to keep an eye on is what’s occurring in counties that were slow to react to the COVID-19 threat. Some are now going through their own ever-worsening contagions and these staggered outbreaks make it difficult to reliably predict both supply and demand going forward.

As late in the game as mid-March, Mexican President Andrés Manuel López Obrador dismissed the threat of the coronavirus and refused to implement any of the measures that have become standard operating procedure for countries trying to contain it. At a press conference on March 18th, he insisted that people have to hug each other, saying that “nothing will happen.” By March 28th he had reversed course and was encouraging people to stay home, using the now-familiar lingo of curve-flattening. By March 30th the country had declared a national health emergency.

Brazil’s leadership has been similarly dismissive. The country’s president is one of the few remaining world leaders to not accept the threat, having previously referred to the virus as a “little flu.” In mid-April, he fired his health minister for disagreeing with him and has even joined anti-lockdown demonstrators to criticise the measures introduced by regional governors as “dictatorial.” Both Mexico and Brazil have recently seen a massive increase in both new cases and deaths. As you can see below, the majority of countries in the top twelve of newly reported coronavirus cases are now in developing countries.

The fear is that if the spread is not contained, Latin American nations will have to face domestic health crises after having already been severely affected by the economic consequences of the rest of the world locking itself down. Latin America has already been hit particularly hard due to its economies being heavily reliant on exports of oil, industrials, and other raw materials. Precisely the areas where demand has stalled the most. The MSCI Emerging Markets Latin America Index is much more heavily weighted (more than double) towards these items than its Asian counterpart.

Many Latin American currencies are now also trading at multi-decade lows against the US dollar, thus worsening the economic standing of these nations with respect to their US dollar-denominated debt. If the fundamentals don’t look particularly good, then the technicals look utterly dire. In March the index completely rolled over, falling to levels last seen in 2005. This was after testing the lows of the range it has held since 2017 back in February. It recovered in April to close slightly above 2016’s lows and is currently re-testing those levels. The index actually peaked in 2008 never to return to those levels. All we have are a series of progressively lower-highs followed by the lowest low that we’ve seen in 15 years.

India

Many experts were predicting that India would be very badly hit by the virus due to the country’s combination of an enormous population with relatively low standards of living. Thus far this has not proven to be the case. India is credited with having implemented one of the stronger responses to COVID-19. It ordered its citizens to stay home for three full weeks at the end of March when the number of infected in the country were still low.

On the other hand, Prime Minister Narendra Modi’s fiscal response to the crisis was initially criticised across the board as being insufficient (1% of GDP compared to between 5-13% of GDP by the UK, Italy, Spain, Germany, and the US). As the consequences of the lockdown began to register in the country’s economic data, it became clear that a much larger economic response would be needed. Prime Minister Modi recently unveiled a stimulus package that brings this figure up to 10% of GDP, an investment to the tune of $226 billion that is to focus on “our labourers, farmers, honest taxpayers, MSMEs and cottage industry.”

This great U-turn in fiscal policy can easily be explained by the data. India has recently seen the largest drop in manufacturing PMI in its history. It went from 51.8 in March to 27.4 in April, a lower level than experienced by any other country post-lockdown. The story is even worse for the country’s services sector, which practically evaporated in April, dropping to an incredible 5.4 from 49.3 in March.

On the plus side, as a net importer of oil, depressed energy prices work in India’s favour. When this is factored in, India – unlike the developed world – has interest rates still well above zero, it also has considerable room to manoeuvre with inflation falling. Greatly reduced energy costs have also allowed India to raise fuel taxes, a move which is expected to raise an annual total of around $5.4 billion.

However, since lifting its lockdown, the country has recently seen a rapid increase in the number of newly reported coronavirus cases. It’s still early, but it could be a case of having locked down too quickly and too hard, causing a great deal of economic strife, then allowing the virus to spread as the country rushes back to work. Only time will tell.

Too Soon

Despite showing every sign of being oversold, it may still be too soon to fully grasp the consequences of the coronavirus on emerging markets. In the case of the US, investors have been all too eager to jump back into equities, regardless of what the fundamentals are suggesting. This has been done almost purely on the strength of the Fed’s interventions. Emerging markets, however, do not exhibit anywhere near the same dislocation between financial assets and the real economy. Factor in this worrying new trend of increased cases in the developing world and you have to think that we’re still in the early innings.

by Giles Coghlan, Chief Currency Analyst at HYCM


Learn more about HYCM

High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

The Impact of Coronavirus on the U.A.E Economy

Regardless of how late in the game this declaration may or may not have come, at the very least this raising of the alarm will now urge governments to take the issue seriously and redouble their efforts to prevent its spread.

It’s now becoming widely accepted that moving the infection curve to the right is our best bet at containing the virus without overwhelming our national health care systems. As more data emerge regarding the virus’s epidemiological characteristics, we become better equipped to deal with it and to care for those afflicted.

With these former unknowns gradually transforming into knowns, attentions are turning to the manifold implications that our efforts to contain Covid-19 will have on our increasingly interconnected global economy. Most markets are now well into correction mode, with many already dipping into bear market territory. As far as the U.A.E is concerned, we can currently divide the knock-on effects into impact on travel and tourism, commodities and the effect on Emirati society.

Emirati Society

As far as social effects are concerned, the U.A.E is a highly organised, well-funded, technologically advanced and cooperative society. This greatly increases the likelihood that the radical measures being employed to counteract Covid-19 will succeed in at least slowing its spread.

The speed at which the country has moved to disinfect public spaces, as well as installing thermal cameras, banning Shisha, postponing large gatherings, shuttering educational establishments and restricting prayer times, bodes well for containment. As we have seen from other countries like Singapore and Hong Kong, moving swiftly in a coordinated fashion is key to preventing the virus’s spread.

Travel and Tourism

Air transportation is an important source of revenue for the UAE, being home to Emirates, the world’s largest long haul airline, as well a centre for other major regional carriers such as Etihad Airways and Air Arabia. According to a 2019 report from the International Air Transport Association, air transportation accounted for $19.3 billion, or around 5% of the U.A.E’s GDP last year. When you factor in tourism as well, this figure more than doubles. The World Travel and Tourism Council had travel and tourism accounting for over 11% of the U.A.E’s GDP in 2018.

All airlines will have to contend with cancellations as further flight restrictions come into effect. With global travel almost certain to be severely disrupted well into Q2 of 2020, this is definitely a key part of the U.A.E’s economy that will take a hit. Shares in Air Arabia fell to lows of 1.08AED during Monday’s trading session before recovering slightly in the following days. They are currently down more than 30% year-to-date.

The good news is that the U.A.E’s airline industry is likely to be much better prepared to weather the coming storm than those of other countries. Taking Air Arabia as an example, its trailing twelve-month quick ratio (liquid assets divided by current liabilities) currently stands at 1.24 (higher is better, ratios below 1 are undesirable).

By contrast, Southwest Airlines, which is the largest low-cost carrier in the world, has a trailing twelve-month quick ratio of 0.61. Air Arabia’s quick ratio is also significantly higher than the airline industry’s average, which comes in at 0.29, and thus may be in a far better position to withstand this shock. 

Oil

The U.A.E recently entered the fray of the oil price war between Saudi Arabia and Russia, following the breakdown in talks between OPEC+ members earlier this month. On Wednesday, March 11th it announced that it would also begin ramping up its own oil production.

Abu Dhabi National Oil Company Chief Executive, Sultan Ahmed Al Jaber, stated that the company was currently able to supply the market with 4 million barrels per day, but is planning to increase this amount to 5 million per day in April. Being the only major producer that still prices its oil retroactively, it has also lowered the price of its four grades for February sales by $1.63 per barrel.

The coronavirus has massively exacerbated the demand shock of an industry already contending with a global slowdown. The strategy now appears to have shifted from maintaining a given price level via production cuts to competing for market share with producers like the US and Canada that cannot profitably extract at these lower prices.

Russia, Saudi Arabia and the U.A.E can all endure a lower price of oil without major disruption to their respective economies. Russia currently has the lowest debt-to-GDP ratio of the three, with the Emirates coming in second and Saudi Arabia third.

For now, it appears that all three are intent on pumping more oil, albeit at these lower prices, and accumulating as many dollars as possible. If you consider that the U.A.E is the most diversified economy in the MENA region, it seems as though it could pivot its economy quicker than other Gulf states should lower-for-longer continue to be the narrative for oil going forward.

Gold

As a regional centre for gold trading in the Middle-East, gold in raw, semi-worked and jewellery form is highly important to both the U.A.E’s import and export figures. In 2018, unwrought gold made up the U.A.E’s largest imported item, with exports of raw and semi-worked gold accounting for more than 25% of its exports.

The country’s large gold market is likely to benefit from investors across the entire region flocking to the precious metal as a safe haven. Saudi Arabia and India, both large importers of the precious metal, make up two of the U.A.E’s largest export partners.

However, its involvement in a variety of gold industries makes soaring gold prices something of a double-edged sword for the Emirates. Elevated prices in the raw commodity are good for its bottom line as a re-exporter of large quantities of African gold. Nevertheless, high gold prices will tend to weigh on its extensive jewellery trade.

Indian families account for the largest privately owned hoards of gold in the entire world, more even than the Saudi royal family. As gold pushes higher and the rupee falls, the U.A.E’s 3.5 million Indian migrant workers, who make up around 27% of the country’s total population, are far more likely to be sending their money straight back home, rather than purchasing gold jewellery as they are ordinarily known to do.

By Giles Coghlan, Chief Currency Analyst at HYCM

About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.


High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

Gold in a Time of Crisis

The latter half of 2019 was dominated by the improbable rally of US equities from all-time high, to a higher all-time high. Keywords such as “global slowdown”, “repo market” and “US-China trade war” kept cropping up regardless of the asset that you were covering. And now, the beginning of 2020 has been all about “coronavirus”, “Covid-19” and “the worst drop since.”

Writing about gold is also pretty interesting. Gold has a peculiar relationship to other asset classes. In times of plenty it sits there looking shiny, being no one else’s liability but yielding nothing. You can understand its long history of being called a relic of barbarism, even before Keynes referred to the gold standard as a barbarous relic.

It just doesn’t allow for the kinds of tricky financial engineering that keep expansions going well past their prime. Its nature as a safe haven means that gold bugs who hoard and focus on it to the exclusion of all else, develop reputations as permabears and are often dismissed as such. It does, however, seem to react immediately when anything in the global economy seems off. Even permabears get to have their day in the sun.

Where We Find Ourselves

During Monday’s trading session, the price of the yellow metal surged to a high of $1704 – the highest it’s been since 2012. Risk aversion is high as markets attempt to price in both coronavirus fears and new concerns of an oil price war between Saudi Arabia and Russia.

Looking further back, gold has been in an unbroken up-trend since mid-August of 2018. Save for a couple of periods of consolidation last year, from the end of February to the end of May and then again from September to December, it has been on a slow and steady upward march.

This move has seen the precious metal going from lows of around $1160 back in 2018, to its recent highs of just over $1700. That’s a 46% run in about 19 months. Not particularly life changing, but that’s not why people invest in gold. People invest in gold so that when corrections like the one we’re witnessing occur, they don’t lose their shirts.

Yield Curve Inversions

Bond markets speak volumes about the health of the economy and gold seems to be one of the few assets that listen. If we go back to August of 2018, we can see that there was a bond market catalyst behind gold’s move up. 2018 was the year that markets started paying attention to yield curves again.

During that summer, the spread between 3-month and 10-year treasuries tightened in a manner last observed during the crisis of 2008. It then inverted. When the yield curve inverts, shorter-dated treasuries yield more than their long-term counterparts, which signals growing uncertainty regarding the economy’s long-term prospects.

This last leg of gold’s two-year uptrend was initiated in August of 2019 by another, even more important, bond market catalyst. That was the month when the US 2-year and 10-year yield curve inverted. The two and ten are the most closely watched bond yields by market analysts. This is because their inversion is a highly reliable recession indicator, having successfully predicted every US recession since the 1950s.

Gold markets took both of the above inversions seriously, despite US equities being at or around their highs during both events. According to Credit Suisse, following an inversion of two and ten year treasuries, stock markets will rally on average by around 15% for another 18 months before recession finally sets in around 22 months after the inversion. We’re now 7 months on from that inversion and the S&P 500 rallied by over 19% before coronavirus hastened what many were regarding as inevitable.

Volatility Spiking

Covid-19’s impact on the global economy has led to a spike in volatility across the board. Whether it’s equities, currencies or commodities, all the relevant measures have been going through the roof. Gold has not been immune to this. At the time of writing, the CBOE’s gold volatility index (GVZ) is up by 117% since mid-February. During the March 9 session it was up by over 300% , surging from just under 11 on February 13, to a high of over 45. On that day the index closed at its highest level since June of 2013.

Losses Being Covered

At the moment gold prices seem to be being pulled in opposite directions. On the one hand investors are flocking to gold as it fulfils its traditional role as a safe haven asset. On the other, it has already made impressive gains since it began its upward trajectory back in August of 2018. Every top since then has been sold by traders as they attempt to book their profits.

What we’re seeing now is likely more than just profit-taking. Recent market turmoil has left many investors vulnerable to being liquidated elsewhere. Many are in danger of—or are already receiving—margin calls. Sometimes you sell because it’s prudent to do so. At other times you sell because you have no other choice. This is likely to be the case now as investors scramble to raise money in order to cover their losses in other asset classes.

Bonds Yields Crashing, Interest Rates to Zero

On March 3 the Federal Reserve conducted an emergency 50 basis point rate cut to a range of 1-1.25%. The market reacted by dumping, signalling that this was nowhere near sufficient. In the wake of this emergency cut, the market is now broadly expecting another 50 basis point cut at the Fed’s March meeting, followed by a further 50 basis point cut in April. This effectively takes US rates down to the zero lower bound.

As investors flee riskier assets like stocks and oil, they’ve been ploughing into the perceived safety of US treasuries, causing yields to drop precipitously. In the first two weeks of March not only did the 10-year treasury fall to a record low of under 0.7%, but the entire US treasury yield curve fell below 1% for the first time in history.

In such a scenario gold becomes even more attractive to investors because not only does it receive capital from the safe haven play, it’s also likely to receive inflows from capital that would ordinarily have been earmarked for bond purchases.

Things to Keep an Eye On

The CBOE’s gold volatility index ought to be closely monitored. While it’s true that we’re entering unexplored territory that’s highly favourable of risk-off assets like gold, we’re also at multi-year highs in the precious metal. This will exacerbate swing if gold continues to rise and stocks continue to fall.

Additionally, the infamous Fed is still in play here, with many speculating that the Federal Reserve will be forced to step in and save markets once again, like it did during the Great Recession. The manner in which markets shrugged-off this recent intermeeting cut makes it look like only significant and unprecedented intervention will prevent a global recession. Quite what this would look like is anyone’s guess, but even a hint of it is almost certain to adversely affect the price of gold.

Finally, gold mining stocks are an interesting case in this environment. This traditionally risky and capital-intensive business has just received a windfall of sorts. Firstly, the price of the thing they’re pulling out of the ground is up some 10% this year alone. Secondly, their greatest expenditure just tanked in price and is currently down 25% since the beginning of the year. In such an environment you can expect the industry’s narrow margins to increase and earnings to outperform other sectors in the coming quarters.

By Giles Coghlan, Chief Currency Analyst at HYCM

About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.


High Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.

How to Become a Pro Trader: All You Need to Know for 2020

We caught up with him ahead of his upcoming forex seminar on what to expect from the global markets in 2020. He was kind enough to give us a sneak preview of some of the material he’ll be covering with advanced traders at the Dukes The Palm Hotel in Dubai on February 21st.

Why does oil drop in a risk-off environment?

We’re barely into the new year and have already experienced two back-to-back news cycles that have greatly influenced the price of oil. Each has pulled the price in opposite directions and has provided some key insights into how today’s energy markets react in a risk-off environment. At the beginning of the year, we saw oil rallying on the back of an escalation in US-Iran tensions.

The rally was destined to be short-lived as a rapid de-escalation against a backdrop of oversupply saw the price plummeting to levels lower than those prior to Qasem Soleimani’s death. After breaking new yearly highs, the price has plummeted on the back of new fears that the coronavirus is at risk of becoming a global pandemic.

The possibility of a more protracted US-Iran conflict is an instance of a risk-off scenario supporting the price of oil due to fears of a shock in supply. Recent coronavirus fears are an example of a risk-off environment leading to a sell-off in oil due to worries of reduced demand.

Which is the dominant narrative? We would have to lean towards the second as coronavirus comes with huge implications for global growth, impeding as it will the flow of both materials and people in a global climate where growth is already slowing, and oil is in oversupply.

How will Brexit negotiations impact the GBP?

It seems that the Sterling’s woes are to show no sign of abating through 2020. As the sugar high of Boris Johnson’s re-election and a call to “get Brexit done” begin to wear off, the picture is far more sobering than short-term market moves indicated. A slew of disappointing economic data from the UK paints a picture of a nation still massively in the grips of Brexit uncertainty, as well as lack of confidence in the economy’s short-to-medium term prospects.

In January we saw the GDP dip further into negative territory, industrial production also turned negative, along with lower than expected CPI readings and poor retail sales figures despite the expected Black Friday rush.

With no signs whatsoever of a clean break from the EU or the inauguration of a new era of prosperity for the United Kingdom, the mood on the ground seems to be one of keeping a tight hold on purse strings, lowering overheads and preparing for lean years ahead.

All this is almost certain to have knock-on effects on the wider economy as well as other measures of economic health. The BoE stood pat last week, opting to keep interest rates where they are in the face of growing pressures to cut rates. This pressure will undoubtedly continue to mount, especially if upcoming economic data continues to disappoint.

Where is gold going in 2020?

In many ways, gold remains the big question mark for 2020. The yellow metal’s performance regularly has traders scratching their heads. They’re often excited to witness increasing geopolitical upheavals only to be disappointed at unconvincing price spikes that lack follow-through.

The beginning of 2020 has been no different, with many news items in the headlines to support the bull case but a price that seems to have been struggling to initiate a new leg up. Gold’s price charts are rife with contradictions.

So far in 2020, the price of gold has been trading at levels last seen in 2013 with coronavirus fears failing to push the price back to the highs reached earlier in the month with Iran dominating the headlines. We’ve also seen all-time highs in many gold pairings, except the one that truly matters most (XAUUSD).

Are we overextended following a 40% run since August of 2018? Or are we just getting started as the gold bugs would have you believe? This will be an interesting story to follow closely throughout the rest of the year as sentiment pulls in one direction and certain fundamentals pull in another. Reduced US recession fears are definitely exerting downward pressure, as well as the fact that Russia is expected to greatly curtail gold buying throughout the year, and China’s own purchases are currently on hold.

How do you recognise changing market sentiment?

Being quick to spot potential shifts in sentiment and knowing how to act can be a great addition to any trader’s toolset. There are two key points to keep firmly in mind when employing sentiment-based strategies; select which sentiment is most prone to shifting, and acting on it while it’s still fresh, without resorting to chasing the resulting move.

A good current example of this is the Bank of Canada continuing to fly in the face of many of its peers to maintain a non-dovish stance. In some ways, it’s the perfect example of a possible sentiment-based setup. Why? There are three main reasons. Firstly, the information regarding the Bank of Canada’s stance is widely known to the public.

Secondly, there is a widespread sense that the clock is ticking until it will be forced to come in line with its western counterparts. Thirdly, the kind of data that’s likely to initiate such a change in policy is constantly streaming in, so it’s just a matter of the right data coming in at the right time, thus forcing the central bank’s hand.

We recently witnessed a setup like this that failed to materialise. Had recent CPI data come in negative, this would have been the perfect catalyst for a CAD sell-off as the market would have expected the Bank of Canada to cut rates, which would have exerted downward pressure on the currency.

As we’ve seen, this didn’t come to pass, however, the potential setup remains in place and traders looking to short CAD on a change in sentiment will remain glued to the country’s economic indicators until the incoming data fits the play.

What else can traders expect in your upcoming seminar?

We’ll obviously go into much greater detail on all the above topics, but there’s a great deal more to discuss. We’ll go into the US-China Phase 2 trade deal and point out what important features to look out for. We’ll draw parallels between the coronavirus and the SARS outbreak of 2003, looking specifically at what SARS has to teach us about possible market reactions to coronavirus.

Beyond this, we’ll also be looking at the currencies and commodities that traders may want to be short or long in a risk-averse environment, and conduct a deep dive into central bank minutes, what they tell us and how to read them. I’m very excited for another opportunity to touch base with a host of professional traders and share what I’ve been researching with them. We’re going to have a good time.

By Giles Coghlan, Chief Currency Analyst at HYCM

Register now for the advanced trader seminar taking place in Dubai on February 21st to find out everything you need to know for 2020.


About HYCM

HYCM is the global brand name of Henyep Capital Markets (UK) Limited, HYCM (Europe) Ltd, Henyep Capital Markets (DIFC) Ltd and HYCM Ltd, all individual entities under Henyep Capital Markets Group, a global corporation founded in 1977, operating in Asia, Europe, and the Middle East.