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Gold soared to an all-time high on broad weakness in USD amid U.S./global stagflation, corona stimulus 4.0, elevated U.S.-China cold war tensions and hopes for YCC talks by Fed

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Gold (XAU/USD-spot) made a lifetime high of 1945.69 in the early European session Wednesday, soared almost +2.37% on broad weakness in USD amid U.S./global stagflation, corona stimulus 4.0, elevated U.S.-China cold war tensions and hopes for YCC (Yield Curve Control) talks by Fed in its next monetary policy meeting later in the week (29th July, Wed). Gold is also getting a boost for U.S. corona as-well-as as political uncertainty (ahead of Nov election) and also intensifying riots in various U.S. states.

The market is expecting Fed’s Chair Powell may consider to keeping the YCC bazooka in the monetary policy toolbox for possible use in future if U.S. bond yields surged as a result of an unprecedented supply of debts (UST/bonds) to finance the deluge of unlimited corona stimulus/relief package. The Fed/UST can print unlimited dollar/UST, but they can’t print Gold, which has limited supply.

It’s now almost clear that before Jan’21, the COVID-19 vaccinations for a large portion of the U.S. population may be very difficult, even if the much-awaited coronavirus vaccine develops within Sep’20. That means the Capitol Hill will be obliged to continue its coronavirus relief and another fiscal stimulus (grants) till at least Dec’20. And after corona stimulus 4.0, there may be corona stimulus 5.0 to accommodate Trump’s insistence of a payroll tax holiday. Also, after the Nov election, there may be a big (job producing) infra stimulus by early 2021 including transport, telecoms and healthcare.

And the Fed will continue its unlimited QQE-4 till at least H1-2021 and only after that it may start the tapering, depending upon the COVID-19 vaccinations and elimination (COVID-19 curve flattening). The Fed will watch the trend of economic recovery and if it gets confidence that the U.S. unemployment rate will return to around 4% by Dec’21, only then Fed will talk about tapering; otherwise, the Fed will continue its pandemic QE till at least H1-2022.

In brief, there would be a deluge debt (UST) issuance by the U.S. Treasury to fund corona stimulus, which may depress the price of UST in the secondary market, resulting in higher bond yields. The U.S. Treasury (government) needs lower borrowing costs (bond yields/coupon rates) to fund its unprecedented corona stimulus. Thus, the Fed may keep the YCC in its toolbox and jawbone the UST yields to ensure that it does not surge.

The Fed is already buying bonds (USTs) at a record pace, which is also helping the US bond yields lower. But despite that, the US 10Y bond yield almost tripled from March low of 0.318% to +0.959% in June, now trading around +0.60%. The same is true almost for all other major G20 global central banks, especially ECB, BOJ, BOE and also PBOC to some extent. The US dollar index (DXY) slumped over -5% from the March high of 102.99 to a low of 93.48 made on Monday (27th July). At a glance, technically DXY may further go down to 92.70-91.25 in the short term; but it’s extremely oversold now.

Gold is also getting a boost of U.S./global stagflation like scenario (lower economic growth, higher inflation, and higher unemployment). Almost all the major G20 economies are scrambling for both monetary and fiscal stimulus at a record pace so that the short term corona recession/stagflation does not turn into a long term economic depression. The resultant surge in both central bank balance sheets and government debt coupled with shrinking GDP output is helping Gold.

Looking ahead, the trajectory of Gold will also depend upon the development of the COVID-19 vaccine, the full reopening of the locked-down economy and central bank QQE tapering.

Talking about COVID-19 vaccine, on early U.S. Monday, Gold also slips from the session high after the U.S. biotech company Moderna announced the beginning of its mRNA COVID-19 vaccine Phase-3 clinical trials which will include around 30K people in the U.S. Moderna also said it’s on the track to deliver some 500M doses of the COVID-19 vaccine annually. Moderna stressed the number could even increase to 1B doses per year as a result of its cooperation (manufacturing JV) with Lonza.

But Gold soon recovered after the White House NEC Kudlow confirmed coronavirus relief bill 4.0 will continue $1200 direct payments to Americans while noting that the Trump administration will lengthen the federal eviction moratorium. Kudlow is also optimistic about the ‘V’-shaped economic recovery and he still believes that the economic data for July will be good despite some moderation. Kudlow is now expecting a GDP growth of +20% in H2-2020.

Kudlow said on Monday:

There’s a huge housing boom. There’s a retailing boom. That’s an automobile boom. Trucking is still very strong. We’ve had a jobs boom, so far. And contrary to some poor reading, unemployment claims and continuing claims are falling rapidly, and the July jobs number on unemployment and job increases I think is going to look pretty good. We’re looking carefully at any moderation in the story. I get that, and there will be some in July. But I think the ‘V-shaped’ recovery and the 20% second-half growth is still very much intact.

On Sunday, Kudlow said:

There’s a $1,200 check coming. That is going to be part of the new package. I would have preferred a payroll tax cut, on top of that check. We have had a flood of inquiries and phone calls and complaints that small stores and businesses, restaurants can’t hire people back. They (Democrats) went too far. Maybe last March, it was necessary for that, but, really, there are consequences of people not returning to work (for $600/week additional PUA).

As a pointer, on Sunday, the U.S. Treasury Secretary Mnuchin also said:

I think workers and Americans understand the concept that you shouldn't be paid more to stay home than to work--- the new bill will provide additional unemployment benefits, but it will be less than the payments issued under the CARES Act. He said some workers were collecting more than they earned on the job. As a result, when businesses were reopening some employees did not have an incentive to return to work. Trump administration and Senate Republicans are on the same page with a $1 trillion package, but in the interest of passing a bill quickly, issues that are more difficult to negotiate with Democrats could be held off for another bill.

Talking about U.S. coronavirus stimulus 4.0, the Senate Majority Leader McConnell is expected to unveil the Republican stimulus plan later Monday, which will contain around $1T worth of fiscal stimulus. This will extend pandemic unemployment assistance (PUA) at a reduced rate of $400/week from $600/week, provide a new round of direct stimulus checks and provide money for schools and virus testing.

But, congressional approval of any package may be very difficult, as there is a huge gap between Democrats approved HEROS Act ($3.5B) and that of Republicans ($1.3T). Trump indicated that he is willing to reconsider the PUA at around 70% of a worker's former wages with a minimum floor of $200/week. But the U.S. House Speaker Pelosi indicated that $1.3 trillion is ‘not enough’ and has reiterated support for the continuation of PUA. Pelosi also wants corona grants for state and local governments in her HEROS Act. Pelosi argued Sunday that the Capitol Hill should also stimulate the Main Street like the Fed, which is popping up the Wall Street (stock market):

When they say it's too expensive, how can they say such a thing when, right now, the (Federal Reserve) is just propping up the stock market? The stock market looks good, huh? Well, federal dollars are helping to make that happen. And that's okay, and that's a good thing for the economy. But we should have trillions of dollars to prop up workers. We've never seen anything like this.

Bottom line:

Thus, stimulus negotiations between Democrats (Pelosi) and Republicans (Trump) are expected to linger through the 1st week of August, with both sides under pressure to reach a compromise before Congress goes into recess. This coronavirus stimulus politics may affect Gold to some extent along with the rapid progress of COVID-19 vaccines (Moderna, Sinovac, Oxford, and BioNTech). As a part of his daily ritual (like China phase-1 trade deal in late 2019 to keep Dow elevated), Trump said Monday he expects good things to say on coronavirus therapeutics soon.

Technical Outlook: Gold Spot (XAU/USD):

Technically, whatever may be the narrative, Gold now has to sustain over 1950 for a further rally to 1965*/1980-2005*-2025 and 2055*/2075-2110*/2175 in the near term (under bullish case scenario).

On the flip side, sustaining below 1945, Gold may fall to 1929/1915*-1905*/1895 and 1870*/1825-1805/1785* in the near term (under bear case scenario).

 

https://www.iforex.in/news/gol...

 

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