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  • Gold prices trying to find a bottom following a switch in safe-haven flows.
  • US dollar and bond market is in a bubble, bulls waiting for the pop. 

Gold is looking for a bottom having dropped significantly this month from a high of $1,703 to a low of $1,451.08, trading today between a corrective range of $1,464.37 and $1,501.20/oz. The downside is counter-intuitive to what would normally mean a bid for gold, as US stock markets plummet.  

In an environment that would usually attract a safe-haven bid for the precious metals market, even as the great Coronavirus Crash has been frightening in its speed and breadth, gold has crashed. The deleveraging and crisis flows have meant that investors have needed to cash in on their 2019 winners, such as gold, and a move into cash has exacerbated the downside in the precious metals market, similar to what happened in 2008. 

US dollar climbs in a bid for USD liquidity

However, while the US dollar climbs in a bid for USD liquidity, whereby the cost of getting dollars through swap contracts soared despite the best efforts of the Federal Reserve and other central banks, gold prices could be back on the rise again as the cat gets let out the bag when considering the US bond market bubble. Long-term US yields have spiked as investors sold their positions amid discussions about a potential $1 trillion federal stimulus to support the economy and that should be a canary in the mine for investors. 

We are entering what would usually equate to a deflationary market for the US dollar, whereby the Federal Reserve has cut its benchmark federal funds rate by 1.5 percentage points, to just above zero, in two emergency meetings. The Fed has also pledged to buy $700 billion in Treasuries and mortgage-backed securities. The Fed is now also lending money to big companies that have lost access to private financing, by buying commercial paper directly from issuers. And now, the US president, Donald Trump and his administration have been discussing a plan that could amount to as much as $1.3 trillion in spending. the plan will be including direct payments of $500 billion, or more than $1,000 per person – helicopter money. Then, what currency can rise whereby the Treasury Secretary Steven Mnuchin tells the Republican senators that in the absence of government action, in a worst-case scenario, the unemployment rate could rise to 20%?

Can’t call the bottom until the dollar demand shifts

The price of gold will likely find a bottom, but the situation is fluid and timing is anyone’s guess. US stocks could have a lot further to fall in a worst-case scenario, targetting the 2008 lows. In such a scenario, as investors continue to cash out of long holdings to cover margin calls, gold could fall further from here, until the dollar flips over and gold attracts a safe haven bid again. “Further, CTA selling pressure is adding weight on prices as the trend followers are set to target a net short position in gold for the first time in nearly a year,” analysts at TD Securities argued. 

Gold levels