Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
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.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)