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Gold Weekly Commodity Analysis
Ahead of the Tier 1 data out later this week, the US dollar has started the week where it ended last week, as the markets process the G-7 proposals of a 15% minimum global corporate tax rate. We are also currently in a Fed blackout period until next week’s meeting so the real news the market can use to reprice from is inflation data this week from the CPI reading on Thursday.
Market expectations are for higher CPI readings, and for the Fed to maintain policy, but any talk of talking about raising interest rates would see the dial shift for the greenback next week. A comment by Treasury Secretary Janet Yellen, who said that higher rates in the US would be a “plus”, failed to support the dollar, while adding pressure on the risk-on trades yesterday. Central banks are generally keeping their loose monetary policy to support their economies, though some central banks are starting to reduce bond purchases but a shift to outright tightening is not imminent or until the Fed makes the first move.
There is still a global recovery in the second quarter of 2021 as countries keep vaccinating more of their population and protecting the most vulnerable against the coronavirus. The UK is becoming more jittery as variants of the diseases could scupper the June 21st re-opening of the entire economy, but the general world consensus is, that progress is being made.
Gold is positive for the year having had 2 consecutive months of gains, erasing the losses accumulated during Q1. Gold ended May at US$1,899.95/oz, the highest level since January and back above its 200-day moving average.
The key drivers of gold’s performance during May included momentum from the lows seen in 2020, a depreciation of the US dollar, and lower real rates in the US treasury market. The chart from the Federal Reserve Bank of St. Louis, shows the relationship of prices in Gold versus the breakeven inflation rate. This is a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities (BC_10YEAR) and 10-Year Treasury Inflation-Indexed Constant Maturity Securities (TC_10YEAR). The latest value implies what market participants expect inflation to be in the next 10 years, on average. And if that keeps rising, it would appear the relationship is for Gold to follow higher too.
Through May 2021, gold ETFs saw their first net monthly inflows since January. Overall holdings in these products rose by US$3.4bn (61.3t. 1.7% AUM) to US$222bn (3,628t). Of these, the positive inflows in gold ETFs, stemming three consecutive months of outflows, were the biggest single contributor to the month’s gold price rally. Net long positioning on COMEX and gold ETF flows will continue to be useful metrics in determining sentiment, particularly in relation to inflation and hypothetical tapering.
US10 year yields remain higher year on year due to continued uncertainty over the economic recovery and inflation. Moreover, real rates dropped as inflation expectations, as signalled by TIPS breakeven, increased. Fears over inflation, and whether it will be transitory or not, continue to be supportive for gold. Should higher levels of inflation become established, gold’s appeal as a hedge against a reduction in purchasing power would be improved.
Another thing that is a bit of an unknown is the effects the new Basel 111 laws will have on the derivatives gold markets. Gold is classes as a Tier 1 asset and banks need to hold this level of asset on reserve to maintain their supplementary leverage ratios in the USA. But at the end of June the European commercial banks will have to be compliant with new legislation. Which in itself could be the end of the non-allocated/ non-physical markets in precious metals. Which could potentially give the physical metal a boost in price as demand outstrips supply.
The Basel 3 accord is a set of global financial reforms developed by the Basel Committee on Banking Supervision under the domain of the Bank for International Settlements (BIS), an organization headquartered in Basel, Switzerland. These coming changes in bank system operations are to strengthen regulation, supervision and risk management within the worldwide banking industry.
The goal of the forthcoming Basel regulations is to limit the levels of risk that banks take on in the pursuit of profits, which would hopefully prevent a major worldwide financial crisis if markets turn negative.
The London Bullion Market Association trades an average of $20 billion in gold every day, which is more than $5 trillion annually. Virtually all of this trading is in the form of unallocated precious metals, so any signs of stress should be seen here first.
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On a monthly chart the 20-period moving average, red ema, acted as support and now price action is back up towards the 2011 highs. The momentum and price action are currently extremely bullish on the higher time frames and should June end green, traders will be looking to get on for the acceleration back above $2000/oz.
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On the Weekly chart, the clear break out of the descending channel can be seen and last week’s price action was nearly a retest of that breakout trend line. The only bearish thing that can be said about that price action is that it was the first lower weekly low in 7 weeks, and a move higher this week to take out last week’s high would be a very good sign of buyers still outnumbering sellers.
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Looking at the price action on the Daily chart the daily period 20 exponential moving average acted as support, so should it be retested and price close lower than that dynamic support level, this could be the signal to raise stops if you are long or even take profits and wait for a close above before getting long. Justin case the 2011 highs acted as a psychological barrier with the $2k confluence.
