Golden Opportunities

You might be inclined to call Monday’s headlines “inauspicious” given they were dominated early by “second wave” coverage and reports of gold surging to new records.

Neither of those two things (more coronavirus cases and an insatiable bid for bullion) should be consistent with risk asset performance. But US equity futures didn’t seem to mind.

Market participants believe the Fed meeting will give gold another excuse to climb as the FOMC will likely reinforce its commitment to keeping rates glued at the lower-bound indefinitely. As long as real yields press lower, the fundamental case for holding an inert metal with no underlying rate of return is intact — if you’re into that kind of thing.

Eventually, the Fed will roll out a new framework for achieving its inflation target, and that will presumably include some manner of plan for engineering and tolerating overshoots. A world awash in debt needs low real rates, and every government that “counts” is running up the tab to fund stimulus. Throw in soaring geopolitical tensions and the case is made.

The dollar extended losses Monday, with the Bloomberg dollar index at its lowest since February 2019 and the DXY at levels last seen nearly two years ago. Asset managers have piled into the euro as the new jointly guaranteed recovery fund is seen marking the dawn of fiscal unity, dramatically increasing the appeal of the common currency.

“The thing that’s changed in the last few days is that it’s not just gold which has gone up against the dollar, but almost everything”, SocGen’s Kit Juckes wrote. “That’s partly driven by a sense that the US is having a harder time controlling the virus than others, which will see the US economy under-perform”. He called the rush into gold a “frenzy”.

This is poised to be the worst July in nearly a decade for the greenback, which is riding a heinous string of weekly losses.

“The USD has now seen a clear break of long-term flagged supports, seen at 94.65 for the DXY and at 1190/83 for our preferred measure, the BBG DXY”, Credit Suisse said Monday, adding that while “the pace of the collapse is leaving the market short-term overstretched, we believe this marks a major sea change and the completion of a major top and we look for a further material medium-term weakening of the USD, with supports for the BBG DXY seen at 1177 initially ahead of 1150 and eventually 1139”.

“The bar for any reversal in the dollar decline seems to be set rather high”, ING remarked. “After the EU summit led to rises in EUR and cyclical currencies vs USD last week, the dollar now faces a mix of geopolitical tensions and uncertainty about the US economic recovery”.

You get the idea. Last week’s major themes are still in play — and “big league” to quote a certain irascible world leader whose penchant for gilded wares and gold-themed accoutrements is legendary.

On the virus front, China is seeing the most serious outbreak of domestic cases in months. There were 61 new infections Monday, and 57 of them were “homegrown”, as it were. Worse, 41 of them were in Xinjiang, the focal point of international ire when it comes to Xi Jinping’s human rights record. This comes a month after officials in China successfully stamped out a worrying outbreak in Beijing. Meanwhile, the epidemic is spiraling in India, where cases rose 20% over the past week, and Spain is struggling to contain a new outbreak as well.

When it comes to the dollar story, don’t lose sight of the big picture, especially if what you’re basing your bear case on is more stimulus out of Washington and the attendant widening of the deficit.

“Don’t think for a moment that there won’t then be a round of further mega stimulus needed everywhere else too — because it will. Jobs are gone and aren’t coming back. Many supply chains are moving and aren’t coming back. Some capital flows will soon shift and won’t come back either”, Rabobank’s Michael Every wrote Monday, on the way to delivering the following colorful take which I must present without further editorializing:

Do you really think now is the time to be selling USD, because a moving average says so, or for using this dip to buy them and hold them tightly? I guess it depends if you think nobody else will require another huge stimulus package they can’t afford relative to the US or not. And it depends on if you believe those in market-facing jobs in air-conditioned offices/at home have a better grasp of the likelihood of US-China conflict happening than the people who are involved with war professionally: your choice is PowerPoint vs. Power and ‘Death crosses’ vs. Crossings and Death.


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