PREDICTION OF THE GOLD PRICE: NEUTRAL
- Gold prices rebound as the Fed bends to remove tensions from the credit crunch
- Fears of an economic slowdown could rekindle liquidation pressure
- Retail sales in the United States and Chinese GDP data top the economic calendar
Gold prices were trading at the 2020 low just a month ago, as the coronavirus epidemic hit the credit markets. Lenders were concerned about the viability of the borrower as global growth halted capital withdrawal. This drove up borrowing costs and pushed desperate market participants to liquidate, with gold ending up in the cut block alongside stocks as well as cyclical currencies and commodities.
Since then, the metal has fully traced these losses, the markets having expressed confidence in the Herculean efforts of the Fed to prevent a credit crunch in 2008. The central bank has made its quantitative easing program unlimited, has implemented the FIMA repo facility allowing large holders of treasury bills to temporarily swap bonds for cash, and announced $ 2.3 trillion in new loans to small and medium businesses as well as municipalities.
The minds of investors seemed really elated. The so-called TED spread – a measure of tension in the credit market that examines the difference between lending rates on 3-month offshore eurodollar deposits and similar T-bills – rose from a peak of almost four years north of 70 bp at a much more manageable level. 36bps. Overall, this corresponds to the trend average in force since the 2008 crisis (~ 33 bp).
GOLD PRICES COULD FALL WITH RETURN OF LIQUIDATION IN A GLOBAL SLOWDOWN
The key question now is whether optimism is maintained. While the stimulus measures seem to have succeeded so far in opening up the credit markets, its ability to stimulate economic activity over the long term seems limited. Inexpensive credit and subsidized purchasing power are probably not very useful beyond the admittedly useful perspective of bold action, as they cannot be truly exploited in the context of a generalized foreclosure .
For growth to truly rebound, people must come out of hiding places and reconnect with the economy. That doesn’t seem to be on the menu at the moment, as new Covid-19 cases continue to emerge along a steep upward curve, suggesting that the epidemic is raging with flying colors. The longer the delay, the more likely it is that the disruption will trigger severe stress, possibly in a cyclical part of the financial system.
The silver rush is likely to reignite as traders reflect on this scenario, with capital flooding with liquidity that tarnishes the volatility of the US dollar as gold prices fall. Inspiration for this could come when the spring meetings of the IMF and the World Bank produce many sound clips from senior officials. Weak US retail sales and Chinese GDP data could be further encouragement.
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— Written by Ilya Spivak, Senior Currency Strategist for DailyFX.com
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