USD Strength Is Hampering Gold's Ability To Stay Above $1,900
Stephen Innes | Sep 23, 2020 08:05AM ET
USD strength is hampering gold's ability to stay above $1,900, although like previous meltdowns, dips are met by substantial demand from the real money community. Retail aggregators (I can confirm) were stopping out below the figure providing the stop-outs in a cascading manner.
Supply/demand fundamentals are a negative drag at the moment given the lack of demand in China and India; the Shanghai Gold Exchange premium sits at a stubborn discount of $50 an ounce to London. ETF and OTC real money demand in London and Zurich has stepped into the gap. Zurich, which caters for much of the world's bar fabrication, is also trading at a London discount.
The reports on Tuesday that more than one mn ounces of ETFs were created should be taken with a pinch of salt, as it was largest related to the quarterly option expiry and not an actual demand. That said, the continued allocation of large bars in London has driven tightness in forwards. Shorter dates are being borrowed, shifting the curve 7-9bp on Tuesday and another 5bp thus far on Wednesday.
I still subscribe to the macro reasons to own gold; dips will continue to be bought, and gold should weather the dollar strength storm, but I would always leave room for a more profound plunge as I'm sure there will be a knee jerk lower on vaccine news., although the vaccine will ultimately create an inflationary firestorm.
The US fiscal and monetary policy mix is very damaging for the dollar. The most likely outcome of longer recovery on the main street means that the policy mix gets even bigger and even worse for the dollar. A democratic sweep means more significant twin deficits, and a vaccine will undoubtedly stoke the inflation flames and push negative real yields even lower.
The Fed lets the economy run hotter, regardless of what Evans said, its still an open-end story. So, all the debasement stuff comes to the fore. Sure, we could see the EUR/USD break 1.20, but the more significant moves will go down in EMFX with the yuan leading the charge and and gold will then moon shot.
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