Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Vaccine news, ETF reductions drive gold correction risk
Ole Hansen
Head of Commodity Strategy
Summary: Gold continues to lose momentum in response to recent vaccine announcements and their potential effectiveness in combatting a not-yet-under-control Covid-19 outbreak. This development has driven a small exodus out of exchange-traded funds with total holdings down 1.7 million ounces or 1.5% to a 2-1/2-month low. While the short-term outlook has turned somewhat challenging, the medium term outlook remains favorable for gold and other investment metals.
Gold continues to lose momentum in response to recent vaccine announcements and their potential effectiveness in combatting a not-yet-under-control Covid-19 outbreak. In fact today we are seeing emerging market currencies as well as stock indexes retreating from their recent run of gains amid concerns about tougher restrictions to curb the resurgent coronavirus pandemic.
Despite of this gold remains on the defensive with the loss of momentum attracting selling from Exchange-traded funds backed by bullion. Yesterday total holdings dropped by 322,000 ounces and since the Pfizer/BioNTech announcement on November 9, total holdings have fallen by 1.7 million ounces to 109.4 million, a 2-1/2-month low.
While these developments may further add to the risk of a deeper correction, it is worth keeping in mind that ETF flows are more often lagging instead of leading the price action. As we have highlighted in previous updates, the vaccine can kill the virus but not the mountain of debt that has been accumulated this year. Central banks are expected to maintain ultraloose monetary conditions, which inadvertently may lead to rising risk of higher inflation through a policy mistake in not reacting sooner to the eventual recovery.
Apart from the risk of rising inflation providing medium-term support to gold, another key driver for commodities in general and especially precious metals, remains the inverse correlation to the dollar. Analysts at the big banks predict that the dollar could fall 20% if widely available coronavirus jab leads to an economic rebound in 2021. This according to an article in the $FT today called “Vaccine arrival expected to trigger dollar slump in 2021”.
The short-term outlook however remains challenged by a deteriorating technical outlook and the mentioned withdrawals from Exchange-traded funds. As per the chart below, the recent price action has seen a bear-flag emerge and a break below $1850/oz carries the risk of a deeper correction towards $1837/oz, the 38.2% retracement of the March to August rally or even down to the 200-day moving average at $1790/oz.
While short-term technical traders and algorithmic trading system may sell into the current weakness, investors with a longer term view are – in our opinion - likely to take the opportunity to accumulated at lower levels.
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