Research

Marius Paun | London, UK | Senior dealer |Friday 16^th April 2021

 

The US Retail Sales Surprises On The Upside

The US retail sales for March came out this week at 9.8% versus 5.8% expected, surprising everyone and showing that the US economy is on the right path. Motor vehicle sales figures were particularly impressive, up 15.1% month on month. Mirroring the good economic data, S&P 500 and Nasdaq both closed at all-time record highs amid dropping yields.

Fed’s Jerome Powel weighed in, saying the economy ‘seems to be at an inflexion point’ ready to start growing at a faster pace with jobs creation also coming in more quickly. He acknowledged the main risk going forward is Covid spreading again. It comes after US health agencies called for an immediate pause of the Johnson & Johnson vaccine following 6 cases of blood clots (despite an impressive 6.8 million doses administered).

We also had the release of the Fed’s Beige Book, indicating growing optimism and accelerating prices. Among the main points: consumer spending increased; economic activity accelerated to a moderate pace from late February to early April; employment picked up as well over the same period.

 

China’s Premier Li Keqiang said his country and the US should step up communication and manage differences better than in the recent past. He made these comments to a group of US executives on Tuesday. Meanwhile, China’s trade balance for the first quarter showed exports up 38.7% y/y. The customs office said the foreign trade has been recovering, now growing at a healthy rate despite a ‘grim and complicated’ international economic landscape. They added there is plenty of ‘instability and uncertainty’ going forward.

Elsewhere, the European Central Bank’s President Christine Lagarde expressed her views that the spill over from US stimulus package will ‘mostly affect 2022’ and that eurozone growth will be boosted by 0.3% as a result. ‘Inflation in the euro area will also be increased by 0.15%’???……Really? no wonder critics say their forecast on inflation is laughable coming from an agency that has not got it right for a decade…. Whoops. On top of that, Lagarde warned of more bankruptcies ahead, but banks are ‘pretty solid’ for now.

Back in the UK, non-essential shops reopened on Monday. It was encouraging for the retail sector where the footfall is already up by 218% week on week. People queuing outside pubs for a drink or a meal also suggests spending is in for a spike. At the same time, UK February monthly GDP was +0.4% vs +0.5% forecast.

Meanwhile, US Oil rallied back this week from a low of $58.75 to $63.2 going into the weekend amid renewed weakness in the US dollar. The same driver pushed gold prices higher, now at $1780, after weeks of treading water between $1680 and $1760. The yield on the US 10-year Treasury moving down to 1.5% also helped the precious metal’s rally.

The anticipation of Coinbase (one of the big crypto exchanges) initial public offering pushed Bitcoin above the $64,000 mark this week, a fresh record high. It quickly retraced towards $60,000 on Friday afternoon on profit-taking, where it seems has found a bottom. Temporary or not, it remains to be seen.

 

Marius Paun | London, UK | Senior dealer | Friday, 16^th April 2021

There now appears to be no doubt that gold has been in a bear market since the beginning of 2021. The price has lost 20% from the high of last August when it was trading over $2075, to the lows of early March this year when it touched $1676, dropping in a steady trend. The reasons behind it were rising bonds yields, specifically the benchmark 10-year Treasury note moving above 1%, rising US dollar and even the fact that ‘bitcoin stole gold’s thunder’ as Barron reported. CNBC quoted strategists at JP Morgan agreeing with the switch from gold into the digital asset which is currently enjoying another explosion.

The US President Joe Biden planned to add $2.2 trillion fresh stimuli to support economic growth and jobs creation, mainly addressing the infrastructure badly needing a makeover after years of under-investments. As a result, that is expected to bring pressure on potential higher interest rates (bad for gold). Regardless of the drivers pushing gold south, analysts are trying to gauge when/if the current downtrend will turn, and will occur sooner rather than later.

We recently saw a retest of lows seen on March 8^th at $1676. The level held and quickly sparked a rebound to $1750s. Many considered gold below $1700 mark as oversold, but the so-called Great Rotation might have also played a part. It’s when investors sell growth, high tech stocks in favours of cyclicals where miners and especially gold miners play an important part. The explanation from a different angle is that the digital world, where all the innovation and growth took place in the last few years, is now taking a breather. Instead, investors are turning towards value, physical assets (including gold) which have been battered hard lately.

Let’s look at the impact of rising bond yields because it seems it’s a mixed bag. Gold pays no interest but actually comes with storage costs. So, if yields are rising, money that would normally have gone to gold in a world with flat or falling rates will start chasing those bonds. Hence increasing bond yields don’t bode well for the precious metal, at least in the short term. But rising yields are a sign of anticipation of economic strength, which in turn gives rise to inflation.

The newly-printed money has already started to flow into the real economy, as we can see from yesterday better than expected retail sales figures in the US. On top of that, Covid has undoubtedly hurt globalisation where international trade took a tumble. So the West in general stand to benefit less from China’s cheap labour costs for example thus paying higher, local prices. That is likely to bring inflation back at some point and gold is the favourite hedge against the fear of inflation. Hence the long-term, rising yields are actually spurring demand for gold even if we may not be at that point yet.

At the same time, a stronger US dollar is also a short-term bad influence on gold prices. However, in the longer term, things get a bit more complicated. Recently, the greenback enjoyed a pullback, on the US Dollar Index, to above 93 from below 90 at the beginning of the year. From the end of March, it seemed to resume the downtrend, but if the bulls re-take control and push the dollar towards 100, gold investors could get hurt. If inflation rears its head, is very unlikely for gold not to rally. Historically there have been times when gold and the US dollar both went up. So the long-term narratives of increased monetary stimulus, returning inflation and lower for longer rates hardly changed and they all support gold.

In its latest Market Commentary, the World Gold Council said that high rates continue to make headlines and together with a stronger dollar kept gold prices at arms’ length. But a ‘rebound in economic activity is also becoming more visible for consumer and strategic investors alike’. The WGC adds that looking forward, a levelling in interest rates as a result of accommodative global monetary policies combines with rising money supply and inflationary pressures may support investment demand in the precious metal.

 

The chart shows a downtrend since the record high of August last year at $2075 with lower highs and lower lows. However, the short-term moving averages have just moved above the longer-term ones and both indicators are now pointing upwards. The price is also above both indicators. So short-term trend turned bullish.

On the upside, the resistance around $1765 seems to have given way this morning and momentum could gather speed. Look for $1805 as the next hurdle for the bulls followed by the 38.2 Fibonacci retracements around $1830. On the downside, if the bears re-establish control, will then have to challenge support around the $1740 mark followed by $1717.