Gold Weekly: Trade War, Politics and Global Growth to Cloud Gold’s Shine

Central Bank demand 

In 2018 gold markets were surprised by the pace and amplitude with which the Peoples Bank of China started to increase their gold reserves.  De-Dollarization, trade war and Brexit concerns were at the top of most gold analysts’ thoughts. However, the Peoples Bank of China gold purchases had a hugely significant impact on gold prices.

Beginning in 2010, Central Banks around the world turned from being net sellers of gold to net buyers. In 2018, official sector activity rose 46 per cent to 536 tonnes of purchases – the second-highest level of demand this century, according to the GFMS Gold Survey.

However, Central Banks mainly buy gold for no other reason than to diversify reserves. The reality is there is probably no sinister anti-dollar movement going on amongst global Central Banks that some fearmongers would have you believe.

Gold – a finite asset as opposed to a fiat currency – can help stabilise economies amid times of market turmoil. Bullion has a long-established attraction as a haven and hedge against inflation. Moreover, gold tends to thrive in a low-interest-rate environment, and it’s possible the explosion of negative-yielding debt in Europe has Central Banks seeking shelter under a gold umbrella. Also, speculation remains rife that Central Banks are bracing for a potential currency war as the US Treasury was sending dollar intervention smoke signals. Given gold’s strong negative correlation with the US dollar, this was possibly adding to the alluring gold appeal.

So, the one constant pillar of support during the gold market’s rapid ascent this year was demand from the official Central Bank sector, which provided and should continue to give a very convincing backstop for gold investors.

 


Gold outlook (September 30 – October 4)

U.S. bond yields and the US dollar may continue to offer the best clues for Gold's next direction.

Last week was a stressful time in the gold market as a multitude of crosscurrents saw gold prices rise early in the week only to fall into the weekend.

As any seasoned Gold veteran will tell you, trying to predict gold prices movements over the short term is challenging – especially given the number of paper leverage contracts that fast money traders can use to trigger takedowns that may scare weak hands out of their positions.

Until the headline hit that the White House is weighing limits on US portfolio flows into China, prices were toppling. Gold was struggling with little significant news, which may have been a result of speculative fast money flow, or possibly one-off quarter-end portfolio reallocation related. Sure, some of the market impeachment worries were calmed when US President Trump released part of the Ukraine call recordings, and then he suggested a trade deal with China is closer than everyone thinks, but that doesn't explain the full extent of the move to the mid $1480s.

 Source: AxiTrader

The Bank of England’s (BoE) Michael Saunders said rate cuts might be needed, which reinforces the prolonged outlook for meagre rates globally. Saunders is an ardent policy hawk now roosting with the BoE doves, which in theory supports the “lower for more longer” interest rate narrative. 

However, perhaps gold investors have taken to the sidelines, preferring to wait until all quarter-end flows are through before re-engaging. 

 

This Weeks Drivers

  • Traders in China price in the risk of losing access to U.S. investment thought to be Yuan negative and Gold positive. 
  • US manufacturing survey data may have a symmetrical impact on gold prices.
  • Impeachment push may bring forward Election 2020 risk where Elizabeth Warren is making considerable strides in the polls.  
  • Rising odds of a Warren presidency are thought to be USD negative and possibly U.S. equity market negative due to the imposition of a wealth tax.
  • Impeachment push ensures President Trump’s dirty laundry airs daily.
  • Central Bank easing narrative shelf life may have expired (perhaps people missed how hawkish Fed Evans was during the impeachment headlines brouhaha).

  

Famous Gold Quotes

"Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But, you really must hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn't produce anything." Warren Buffett

 

AxiTrader in the news on Gold

MarketWatch, September 23, 2019 

“As the dreary survey raises the likelihood of an even more dovish central bank policy shift as the slowdown in the global manufacturing sectors is thought to sit atop the Fed’s ‘wall of worry,’ said Stephen Innes, market analyst at AxiTrader, in a note.

 

Reuters, September 25, 2019

“Compounding into the macro weakness we have the tumult in political landscape brought about by the impeachment process,” said AxiTrader market strategist Stephen Innes.

“The risk could lead to lower equity market and undermine the U.S. dollar and that could be good for gold.”

 

Bloomberg, September 26, 2019

“The move in gold looks convincing enough to warrant some attention as it’s unlikely the political storm clouds over Washington are about to dissipate any time soon,” Stephen Innes, Asia-Pacific market strategist at AxiTrader, said in a note. This “might continue to weigh on equity market sentiment, possibly send U.S. yields lower and could undermine confidence in the U.S. dollar.”

 

 

 

Read more market views from Team AxiTrader: https://www.axitrader.com/au/market-news-blog/.

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