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Coronavirus and Gold update

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Well stock market turmoil in recent days had produced some of the biggest moves in history (EUROSTOXX) and for others (S&P500) since the 1987 crash. The S&P500 for example losing at its worst 26.9% from all time highs made only a few weeks ago. Gold in this context has also had one day big declines most notably at the end of Feb dropping $82.00 in one session, (5.6% intra-day), and then this Friday another one day big fall 4.8%. But within that context Gold did reach 8 year highs briefly above $1,700.

Silver has fallen as the economic slow-down is expected to impact industrial demand, (less phones/laptops being bought), likewise palladium had a one day fall of 30% as demand in the auto industry is expected to be lower near term on a demand/supply shock.

What does it all mean for the Gold price going forwards?

Gold fell as margin calls at the end of Feb forced speculators to sell Gold (their most liquid asset) to raise cash to cover their losses in equity trading, the same was partly true this Friday compounded with professional risk managers reducing risk in all asset classes to preserve cash. With the U.S. now on a firm footing to cut interest rates to help support their economy going forwards (next Fed meeting is March 18th), this in turn should weaken the US Dollar and hence be Gold supportive. The USD has had a rebound in the last few days as virus concerns make the USD the ultimate safe haven play, but in time as the virus narrative subsides the fundamental story of the USD will continue to be weaker once again on a trend basis.

Secondly bond yields in benchmark 10 years for the US and other bond markets collapsed to all time lows way beyond levels that seem rational. US 10 year yields got to 0.31%, 30 year bonds below 1.0%. So bonds are not the safe haven play they were as interest rates lowering in the US takes away their currency advantage on an interest differential, (US govt bonds at 0.50% and German bonds at -0.50%), before that it was 200 basis wider now much tighter in spread terms.

Thirdly, the difference between bond yields and equity dividends (called equity risk premia), means over 2/3s of S&P500 companies have yields higher than US government bonds.

That means equities are a better returning asset even with falling share prices to receive the dividend. But with futures earnings likely to be much lower in the next 2 financial quarters the dividend may fall sharply or not be paid. This means Gold once again is interesting as it also is a currency play and remains an alternative asset class to diversify in that is very liquid.

Central banks will continue to buy Gold as a strategic theme. Late in 2019 Germany started buying Gold again for the first time in 20 years. China has an agenda to equal the US in GDP to Gold ratio which means a target of 1,833 metric tons so still another 5,500 tons or so to go. Since Sep 2019 Gold imports to China have gone up four fold. Where Gold is right now is near to where it opened at the start of 2020, up only +0.83% now, but $1,445 is the 260 day moving average another $50.00 away and is a long term support parameter for a bounce.

Our longer term view is Gold will eventually make all time highs past $1920.60 and have $2,200 as themed target in the next 4-5 years, so near 50% rise. Reason being US slowdown/recession proof asset.

GOLD - weekly chart in USD with 39 week moving average and 52 v 104 week cycles

Support levels in Gold in USD : $1,483 $1,455/45 $1,380 


 

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