Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Bull Market Smoking Gun - 25th May 24
Congress Moves against Totalitarian Central Bank Digital Currency Schemes - 25th May 24
Government Tinkering With Prices Is Like Hiding All of the Street Signs - 25th May 24
Gold Mid Tier Mining Stocks Fundamentals - 25th May 24
Why US Interest Rates are a Nothing Burger - 24th May 24
Big Banks Are Pressuring The Fed To Losen Protection For Depositors - 24th May 24
Another Bank Failure: How to Tell if Your Bank is At Risk - 24th May 24
AI Stocks Portfolio and Tesla - 23rd May 24
All That Glitters Isn't Gold: Silver Has Outperformed Gold During This Gold Bull Run - 23rd May 24
Gold and Silver Expose Stock Market’s Phony Gains - 23rd May 24
S&P 500 Cyclical Relative Performance: Stocks Nearing Fully Valued - 23rd May 24
Nvidia NVDA Stock Earnings Rumble After Hours - 22nd May 24
Stock Market Trend Forecasts for 2024 and 2025 - 21st May 24
Silver Price Forecast: Trumpeting the Jubilee | Sovereign Debt Defaults - 21st May 24
Bitcoin Bull Market Bubble MANIA Rug Pulls 2024! - 19th May 24
Important Economic And Geopolitical Questions And Their Answers! - 19th May 24
Pakistan UN Ambassador Grows Some Balls Accuses Israel of Being Like Nazi Germany - 19th May 24
Could We See $27,000 Gold? - 19th May 24
Gold Mining Stocks Fundamentals - 19th May 24
The Gold and Silver Ship Will Set Sail! - 19th May 24
Micro Strategy Bubble Mania - 10th May 24
Biden's Bureau of Labor Statistics is Cooking Jobs Reports - 10th May 24
Bitcoin Price Swings Analysis - 9th May 24
Could Chinese Gold Be the Straw That Breaks the Dollar's Back? - 9th May 24
The Federal Reserve Is Broke! - 9th May 24
The Elliott Wave Crash Course - 9th May 24
Psychologically Prepared for Bitcoin Bull Market Bubble MANIA Rug Pull Corrections 2024 - 8th May 24
Why You Should Pay Attention to This Time-Tested Stock Market Indicator Now - 8th May 24
Copper: The India Factor - 8th May 24
Gold 2008 and 2022 All Over Again? Stocks, USDX - 8th May 24
Holocaust Survivor States Israel is Like Nazi Germany, The Fourth Reich - 8th May 24
Fourth Reich Invades Rafah Concentration Camp To Kill Palestinian Children - 8th May 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will the Great Unwind Sink Gold?

Commodities / Gold and Silver 2018 Feb 05, 2018 - 01:54 PM GMT

By: Arkadiusz_Sieron

Commodities

In the August 2017 edition of the Market Overview, we analyzed the hawkish turn among major central banks. We pointed out that “Europe has recently been among the most surprising positive economic regions in the world”, which should induce the ECB to taper its quantitative easing program in the fall, supporting both the EUR/USD exchange rate and the price of gold. This is exactly what happened. The dollar lost more than 3 percent in 2018 against the euro, while gold jumped above $1,350 (as of January 25). As we noted in the previous edition of the Market Overview, “the beginning of the year is usually a good period for the gold prices.”


And the best might be yet to come. Why? The answer is: the Great Unwind. In the last few years, the Fed was the only hawk in town. When the majority of leading central banks remained very accommodative, the U.S. central bank heroically raised interest rates and started to unwind its balance sheet in a lonely struggle for the normalization of monetary policy. The chart below doesn’t show a significant reduction, but we see that the amount of the Fed’s assets remained roughly stable since 2015 and started slightly declining recently.

Chart 1: Fed’s balance sheet (red line, right axis, in trillion of $) and the gold prices (yellow line, left axis, London P.M. Fix, in $) from 2013 to 2017.

Now, with strong economic momentum in Europe and with the Bank of Japan saying that it would buy fewer long-term bonds, the situation is completely different. Or maybe not, but the investors’ expectations changed. And conjectures based on hopes and fears are what drive the markets. So let’s look at the premises behind these beliefs.

First, the growing economic recovery in the Eurozone spurs investors to believe that the ECB will tighten its monetary policy sooner rather than later. The minutes from the December 2017 meeting added fuel to the fire, as investors could read that “members expressed confidence that the euro area economic recovery had now moved into expansionary territory”, which “increased the level of confidence in a sustained return of inflation towards the Governing Council’s aim”. Ten yards for euro bulls.

And the political risks may start to abate after the March election in Italy and after German parties form a new government (it is still an unresolved issue, but the main German parties have recently reached a breakthrough in the process, as the Social Democratic Party approved the start of formal coalition negotiations with Angela Merkel's Christian Democrats). Another touchdown.

Second, Japan’s economy also started to recover, and the Bank of Japan Governor Haruhiko Kuroda offered a positive view on the economy and inflation. In particular, he said that the core CPI rate was “moving around 1 percent”, an increase from 0 percent three months ago. In the latest quarterly report on regional areas of Japan, the bank also offered its most optimistic view in nearly a decade. The increased inflation and moderate economic expansion prompted investors to believe that the Bank of Japan may wind down its monetary stimulus, especially after the central bank’s announcement about fewer Japanese government bonds purchases.

Last but not least, other central banks could also cut back on their asset purchases. In particular, the Swiss National Bank is under less pressure to buy foreign assets as the Swiss franc weakened substantially, returning more or less to the level before the currency was de-pegged. So if the SNB normalizes its monetary policy, it may shake the asset markets.

What does it all mean for the gold market? On the one hand, less dovish central banks would imply softer demand for Treasuries and higher bond yields, which gold shouldn’t welcome. On the other hand, the rising expectations of more hawkish ECB and BoJ are likely to sink the U.S. dollar. Indeed, the euro hit a three-year high in mid-January amid rising market odds of an ECB interest rate hike in 2018. Similarly, optimistic comments from BoJ Governor Haruhiko Kuroda sent the yen to a four-month high against the U.S. dollar. As a result, gold prices rallied, which signals that the currency channel is more important for the yellow metal than the yield channel, at least in the short run.

Moreover, any surprising monetary tightening in Japan could be the trigger that will halt the current rally in the global stock market, which could be positive for gold, as an alternative asset class. Theoretically, the same applies to the Eurozone, but a paradigm shift in Japan is likely to have a larger impact, as a ECB hawkish turn is more widely expected. And investors shouldn’t forget that many important trends started in Japan – remember January 2016, when BoJ introduced negative interest rates?

To sum up, given the global economic recovery, it seems that the major central banks may adopt a more hawkish stance soon. The Fed has already started unwinding its vast balance sheet and hiked the federal funds rate a few times. The U.S. central bank is expected to continue its gradual tightening this year, but this has been largely priced into gold (although, the new FOMC may be more hawkish than expected). Meanwhile, although the normalization may not come quickly, investors are quite sensitive to changes in the prospects of the monetary policies in the Eurozone and Japan. Hence, there is room for further declines in the U.S. dollar – the strongest tailwind for gold.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in