The price of gold is relentless in its pursuit of a record high, spiking in the open for the week.
The bulls are confident that the geopolitical backdrops, soaring cases of the coronavirus, the Federal Reserve and various economic data from around the world is going to be plentiful in the last week of the month.
It is very apt that on the week of the Fed, gold bulls have shown their cards so soon.
Continued ultra-easy global monetary policy and the potential for YCC by the Fed will also keep the reflation trade intact and the US economy showing further signs of stagflation. More on that below…
Meanwhile, US-China tension and growth fears continued to dominate market sentiment which gave rise to gold’s strong rally at the end of last week’s business. Gold was up 0.8% to USD1,902/oz, close to a record high, $1,921.07, which just got a lot closer by $10.50 cents.
At the same time, the US dollar continued its downward run ahead of the Federal Open Market Committee this week which will be the main policy event risk for the week.
The analysts at TD Securities explained that the Fed officials have ‟made clear that their forward guidance will be made more dovish and outcome-based soon, likely in conjunction with the formal adoption of AIT when the review is completed.
We don’t expect those developments until after the September meeting, but the chair is likely to continue the process of prepping markets for changes at next week’s press conference.‟
Treasury yields continued to trade in narrow ranges as markets await the FOMC meeting later this week.
Gold’s diverging impetus falls on the US dollar
Money managers have been buying gold in response to the positive macro tailwinds, as the Fed’s largest QE program on record helps to suppress real rates, analysts at TD Securities explained, adding:
Overall, gold has also recently been trading in a pro-risk regime, while the USD has largely been ignored. This week, however, the USD has emerged as a major theme driving price action, which contrasts with recent behavior.
Stagflation fears
The road to stagflation is being paved in gold it would seem.
Due to global government lock-downs being enforced to combat the COVID-19 pandemic, we have experienced a demand-side economic collapse led by the contraction of consumer spending.
The fears are real as rising prices defined as inflation but without the economic growth or demand and thus falling real yields would be creating a breeding ground for stagflation for which gold should thrive within.
With the money supply having risen sharply in the US, fears are gradually emerging that inflation could be the end result, analysts at ANZ Bank explained.
A catalyst is lacking, but sharply higher inflation expectations feeding into higher long-term interest rates would have extremely nasty implications. Central banks would be utterly stuck: either they tighten liquidity and raise short-term interest rates to head inflation off or they let inflation run hot. For now, the consensus still seems to be that governments can spend as much newly printed money as they see fit without any inflationary consequences. But if you look beyond the last decade or so, history suggests otherwise.
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