Weekly Market Wrap 31-August to 04-September/2020
Marius Paun | London, UK | Senior dealer | Friday 04th September 2020
The US Non-Farm Payrolls Data Surprises On The Upside Again
The US economy added 1.371 million jobs in August, slightly better than expectations for 1.35 million payrolls gain. The unemployment rate decreased further from 10.2% in July to 8.4% last month, also beating predictions for 9.8% as the American employers continued to bring back workers following coronavirus disruptions. However it should be mentioned that the pace of job gains slowed relative to recent months.
There were indications that Covid-19 relief negotiations remain at a standstill with a major sticking point represented by the funding of local and state governments. Nonetheless the US Treasury Secretary Mnuchin said he hopes a new relief bill will be introduced next week. Elsewhere, S&P and Nasdaq continued to make headlines reaching new records almost daily. Nevertheless, on Thursday we saw a sharp sell off in US stocks which seems to extend going into the weekend.
China’s Caixin PMI was released on Tuesday showing again positive signs for the economy. Manufacturing was 53.1 versus 52.5 expected, the 4th consecutive monthly expansion. New exports orders showed a significant improvement posting the first growth for this year. Companies started to replenish their stocks but employment remained subdued.
Europe’s inflation did not show encouraging signs. August preliminary CPI came in at -0.2% versus +0.2% anticipated as the effects of the pandemic raised fresh deflationary scares. It remains to be seen if/what sort of action the European Central Bank is prepared to take. A stronger euro against the greenback does not help in that scenario.
Back in the UK, the fourth round of trade negotiations with the US will start on September 8th according to UK Trade Secretary Liz Truss. Despite the lockdown, the housing sector shows signs of resilience with August Nationwide house prices index rising 2% versus +0.5% expected. On another note, the Bank of England MPC member Broadbent said ‘there are no signs of inflation expectations drifting away from the target’.
Gold prices have been on the back foot this week trading around $1920 mark on Friday afternoon. Buyers tried a few times to push the price back above $2000 but so far they failed. It seems like a period of consolidation with investors digesting the sharp rally since March. As the Fed changed its monetary policy to target a higher inflation, analysts are fairly confident that gold returning above $2000 is just a matter of time. How fast it will happened is another story.
The US crude prices dropped this week from $43.17 per barrel to test support at $40.00 despite increased demand for oil and gasoline. The US Department of Energy released its weekly inventories report showing a larger than expected drawdown for oil, -9.36 million barrels versus -2 million estimates. Gasoline stocks also indicated a higher than anticipated drawdown -4.3 million barrels versus -3 million barrels predicted.
After Reaching A Fresh All-Time Record High Gold Takes A Breather
Marius Paun | London, UK | Senior dealer | Thursday, 03rd September 2020
Gold prices reached a new all-time high at $2074 per ounce since our last report was written on July 22nd this year. It retraced below $2000 mark and it’s now swinging around $1950 handle for the past few weeks. Buyers tried a few times to push the price back above $2000 but so far they failed. It seems like a period of consolidation with investors digesting the sharp rally since March.
Having said that, the underlying support remains in place for gold. The money printing machine is still running, interest rates will very likely stay low for even longer than previously thought and now the Fed is determined to let the genie (inflation) out of the bottle. Deflation is to be avoided at all costs so they’d rather have inflation going above the traditional 2% target which understandably was dropped recently. We mentioned before that gold has been described as a hedge against the fear of inflation. If the Fed would achieve higher inflation that would possibly save them from considering negative interest rates, an almost killer scenario for banks. And in the process inflation would eat into that humungous government debt.
The US elections in November for the next White House resident is also likely to affect gold prices. But the question is it going to be a short-term effect or for a longer period? Analysts point out that regardless of the winner will be the incumbent Donald Trump or the challenger Joe Biden, neither is looking to pursue a stronger US dollar policy. A weaker greenback which would make the US exports cheaper is yet another support for gold.
Last but not least turmoil on a number of fronts is a clear and present danger. Widespread civil unrest in the US, trade tensions with China and signs of a potential second wave of coronavirus are all keeping gold investments rather hot. So it would probably be fair to say there are more tailwinds than headwinds for the precious metal on the mid to long term.
There is a widespread opinion that eventually gold will return above $2000 level especially when the Fed monetary policy targets higher inflation. The trick now is the timing, how fast the precious metal will get back up.
The World Gold Council indicated in its last report that inflows into gold ETFs accelerated during the second quarter to a record-breaking of 734 tonnes. Overall inflows for the first half ‘surpassed the 2009 annual record of 646 tonnes and lifted global holdings to 3621 tonnes’. At the same time, gold prices touched record levels in a number of currencies like euros, sterling, renminbi, Indian rupee. On the other hand, buying gold bars and coins slowed to 11 years low.
At the same time, jewellery demand nearly halved to 572 tonnes mainly due to disruption caused by a coronavirus. It appears that gold demand from the West was outpaced by the fall in Asian demand. The report also added that central banks ‘bought 233 tonnes during the first half of 2020, 39% below 2019’s record level’.
An interesting development happened a few weeks back when a filing for Berkshire Hathaway showed Warren Buffett bought 20.9 million shares of giant miner Barrick Gold Corp last quarter. The transaction was valued at more than $500 million. Barrick’s earnings grew by over 80% last quarter.
It’s well known that Warren Buffett is not particularly a fan of gold after he described it ‘does not do anything but sits and looks at you’ as opposed to owning a company which can make you money. At the same time, Buffet sold his shares in Goldman Sachs and a big chunk of his holdings of JP Morgan and Wells Fargo stocks. That speaks volumes of his confidence in the banking sector in the long term.
Gold has been in a sideways trend lately following an incredible rally to $2074, its new record high on August 6th. The short-term moving averages (6) still pointing upwards remains marginally above the long-term one (21) which now points south. The price is now below both moving averages. It’s in a consolidation mode, understandably after such a nice run.
On the upside, the bulls have undoubtedly set their eyes for a push back above $2000 mark. However, there is plenty of resistance around $1950 first. If anything today was a case in point with the precious metal failing to breach above that level. Above that, $1975-$1980 is another hurdle which bulls have to overcome. On the way down, the first target is $1911, followed by $1900. Nevertheless, the bears will target support at $1870. If that’s breached the short-term trend shifts to the downside.