Gold Gets Jittery After Historic Run As Goldman Says World Searching For ‘New Reserve Currency’

Gold traded in a $75 range Tuesday as a furious rally bumps up against profit taking and, possibly, simple exhaustion.

After surging to ~$1,981 in Asian trade, spot gold fell nearly 4% at one point before climbing anew, while spot silver exhibited signs of skittishness as well, slumping nearly 15% from overnight highs (figure below).

The anxious, fidgety moves come on the heels of an astounding rally, catalyzed by a perfect storm for precious metals, as US real yields plunge, the dollar tanks, geopolitical tensions mount, and the world ponders trillions in deficit spending.

Some analysts are turning more cautious. JPMorgan, for example, thinks gold may have “one last hurrah” before it ultimately slides in the back half of the year, while Citi suggests the metal may have settled into a “higher range for longer”, which I suppose is appropriate given that one of the fundamental drivers for the surge is “lower for longer” rates.

Goldman raised its near-term price target to $2,300 today. Jeff Currie says the world is searching for “a new reserve currency”, as the Fed’s anticipated shift to a more aggressive framework for hitting its inflation target could sap demand for dollars.

“Combined with a record level of debt accumulation by the US government, real concerns around the longevity of the US dollar as a reserve currency have started to emerge”, Currie says.

I have doubts about that. There’s no question that we’re witnessing deficits that would have seemed unthinkable just six months ago. And the sea of red ink is poised to get deeper with the new virus relief package.

But de-dollarization is a glacial process, and to the extent it continues, it will be due to perceptions that dollar hegemony is detrimental to global stability, not to any deficit spending by the US.

I’ve been over that repeatedly. While gold can obviously rally on narratives around “great debasements”, the fact is, the petrodollar system likely isn’t going anywhere and China has to recycle its savings. Arguably, there’s no market deep enough and liquid enough to accommodate those flows outside of US Treasurys.

That’s why the European recovery fund is such a big deal. If we see a durable shift towards jointly guaranteed euro bonds, that could create a pool of investable securities which could absorb some of the flows which traditionally go to USTs.

In any case, domestic political strife in the US doesn’t help the dollar’s cause, that’s for sure.

Especially to the extent the turmoil has translated into a lackluster federal response to the epidemic, thereby setting the US on a path to underperform economically in the recovery trade, a scenario which could entail more deficit spending and more accommodation from the Fed.