Safe havens are losing their figurative (and, in gold’s case, literal) luster.
This time last week, it looked as though the world was on the brink of an all-out conflagration in the Mideast, as Iran readied retaliatory strikes following the assassination of its most storied military commander in a US drone strike.
That retaliation came, but it appeared designed to avoid inflicting casualties on US troops housed at the bases targeted by Iranian missiles. The only casualties were the 176 poor souls who perished in the commercial airliner Iran accidentally downed in the tense moments following the strikes.
And so, with Iran presumably constrained in their capacity to seek further retribution (the optics around any aggression by the IRGC would be terrible in the wake of the 737 incident) and the Trump administration seemingly content to squeeze Tehran with sanctions (as opposed to bombing targets inside the country), safe haven assets are beating a hasty retreat.
Gold is still higher for the year, but the relentless push that drove carefully-polished paperweights through $1,600 for the first time since 2013 is over – now, the yellow metal looks like it wants to fall back towards December levels.
It’s lost ground in four out of five sessions. Last week, SPDR Gold Shares saw $1 billion in outflows.
After flirting with the most overbought levels in years, we’re now back in more reasonable territory.
In addition to the receding threat of war, the pullback in havens has been catalyzed by the imminent signing of the “Phase One” trade deal between the Trump administration and Beijing, set for Wednesday.
You should note that there’s the potential for a “sell the news” dynamic in the event the details are underwhelming, especially as they relate to agricultural purchases, which Trump continues to insist will be “massive” under new Chinese commitments.
News that Treasury had removed the currency manipulator label from China was also a boon for risk assets.
Now, the yen has very nearly filled the gap from last May, when Trump shattered a tenuous trade calm on the way to setting in motion the worst month for the S&P of an otherwise stellar 2019.
It’s worth noting that this could damp local appetite for foreign assets. “Japanese investors bought a net 12.7 trillion yen of overseas bonds and shares in the first six months of 2019 when the yen gained 1.7%”, Bloomberg notes, adding that “the outflows totaled 7.8 trillion yen in the last six months of the year when the currency weakened 0.7%”.
What comes next is (as always) anyone’s guess. For the yen, the evolution of the US data and US yields will be crucial. For gold, I suppose what we would say is that with more than $10 trillion in global fixed income still yielding less than zero, you can always make the case for everyone’s favorite “barbarous relic”…