Gold prices took a beating on Friday. The best monthly US jobs report of all time (+2.5mln jobs in May vs expectations for -8mln), combined with almost as impressive US car & home sales data has thrown a spanner in everyone’s forecasts for the US economy; could we be in for a V-shaped recovery after all.
Has the “overly-optimistic” stock market, which appears to have priced the global Covid-19 recession as more of a temporary blip as opposed to the worst recession in a century, been right all along?
The market reaction at the time certainly suggested this could be the case - risk assets rallied and havens were crushed, including gold, which fell to lows of below $1680 from above the $1700 level.
However, gold is sharply higher on Monday, rising back above the $1690 level. Could gold be setting the foundation for another big run to the upside, like we have seen so many times in the past?
Technically speaking, gold yesterday found strong support at the May $1670 low. Technicians will now likely be eyeing a break back above $1700 followed by advancement onto around $1750.
Fundamentally speaking, while the US economy might be in better shape that previously thought, it is still in VERY bad shape. This has important implications for gold, as it ensures one thing: Fed stimulus is going nowhere any time soon.
In fact, Goldman Sachs expects the world’s most important central bank to make 3 major steps between now and September;
1) They expect the central bank to transition back towards a more traditional asset purchase programme, where they think the Fed will announce intentions to buy $80bln in US government bonds plus $40bln in Mortgage-Backed Securities per month. (As opposed to their current, unlimited QE programme, which was more designed to solve market liquidity problems).
2) They expect the bank to outline outcome-based forward guidance - basically this would be setting out economic criteria that need to be met before QE is tapered and interest rates lifted.
3) They expect the Fed to reinforce their guidance with front-end Yield Curve control (as a recent WSJ article hinted the Fed were thinking about).
Basically, the Fed is in this for the long-run. Though they will likely be happy to see the US jobs market rebounding faster than expected, they realise the road to recovery is long.
All the while, gold, which LOVES central bank stimulus, ought to remain in demand.
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