Gold : High Price All Year
(Fri, 24 July 2020). Gold prices completed their multi-year inverse head and shoulders pattern, a bottoming effort that validates the long-term bullish technical narrative. But that doesn’t mean that more gains aren’t still ahead: all-time highs are well-within reach.
The gold price rally remains bolstered by a bullish short-term technical while the fundamental perspective– that real yields will remain low, if not in negative territory for some years to come– remains solid.
BACK TO BUSINESS: GOLD PRICES RESUME RALLY
Gold prices, alongside other precious metals like silver and platinum, are in the midst of their best week since March 23. That was the week that the Federal Reserve announced its extraordinary monetary intervention into financial markets in order to stave off a cataclysmic collapse stemming from the coronavirus pandemic. Gold prices are up over +10% since the close last Friday, while silver prices are up by nearly +30%, and platinum prices have gained nearly +15%.
The gold price rally (as well as the precious metals rally in general) remains bolstered by a bullish short-term technical while the fundamental perspective – that real yields will remain low, if not in negative territory for some years to come– remains solid.
MAKING SENSE OF THE GOLD BREAKOUT – WHAT’S THE CATALYST?
While central banks have not been in the news this week, it’s been the other side of the policy equation that has made waves: fiscal authorities in Europe and the United States are pushing forward aggressive stimulus packages to help prop up their ailing economies. European leaders have agreed to a near €900 billion stimulus package that brings the European Union closer to fiscal integration thanks to its jointly-issued debt, while it appears that the White House and Congress will set aside partisan politics to stitch together another safety-net for the US economy.
Even as the COVID-19 outbreak appears to be worsening in the United States, the beginning stages of a nationwide mask mandate (state by state, if not via the federal government) speaks to the potential for the world’s largest economy to wrangle control of the worst outbreak among any country on earth. Coupled with signs in the southern hemisphere that the influenza season has been quelled in part due to the efforts to contain the coronavirus pandemic, there are green shoots emerging: growth will return faster, inflation will recovery quicker.
THE FUTURE SHINES BRIGHT FOR GOLD AND PRECIOUS METALS
The longer-term thesis for gold prices and precious metals in general remains intact. It’s necessary to compare The Great Lockdown (one of the colloquialisms used to describe the current economic malaise) to The Great Recession.
Like during The Great Recession, the Federal Reserve has responded with expansionary monetary policy. Unlike during the Great Recession, the federal government’s fiscal policy response has proven extremely robust. Rising federal deficits typically fuel inflation expectations as well as higher interest rates; but with the Federal Reserve keeping its main rate tethered near zero through 2022, we may very well be stuck with a net-result of the enhanced fiscal stimulus being higher inflation, but not higher interest rates.
Accordingly, the fundamental backdrop for gold prices remains strong, and appears to be strengthening. Thanks to expansionary monetary policy and even now enhanced fiscal policy responses real yields continue to fall and remain depressed: short-term rates are stuck near zero while growth and inflation rates are rising. An environment defined by depressed and/or negative real yields has historically proven bullish for precious metals.
It still holds that these factors will continue to enhance the negative real yield argument that has been fueling gold and silver’s rallies in recent months, and moreover, the breakout that has been experienced in recent days. You can read more about the impact of negative real yields more in a prior gold price forecast.
GOLD VOLATILITY JUMPS, GOLD PRICES JOIN
We’ve been on this beat for a while, so here comes another rap of the drum: “given the current environment, falling gold volatility is not necessarily a negative development for gold prices, whereas rising gold volatility has almost always proved bullish; in the same vein, gold volatility simply trending sideways is more positive than negative for gold prices.” This remains true.
Gold volatility (as measured by the Cboe’s gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) is trading at 21.58, a 43% increase from its close on July 17. Following a period where gold prices and gold volatility have risen sharply in tandem, the 5-day correlation between GVZ and gold prices is 0.95 while the 20-day correlation is 0.20; one week ago, on July 16, the 5-day correlation was -0.31 and the 20-day correlation was -0.65.
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