By Barani Krishnan
Investing.com – After seeing how its prices have been systematically suppressed since the record highs of August, I told my readers this week to stop thinking of gold as a safe haven when they’re trading it. What I didn’t know was Jeff Siegel of Energy&Capital had beaten me to that advice a year back.
See, Siegel and I have about the same view on gold: Its allure is irresistible to almost everyone. It feels great to wear or have in your vault. It also seems to have the best intrinsic value of all commodities, which in theory makes it a natural hedge against inflation.
But in terms of trading, it’s utter nonsense to call gold “safe”.
There’s nothing safe about an asset whose value is suppressed by banks and so-called “whales” in the business that are colluding to push the dollar and bond yields up instead – despite the frightening path for the U.S. deficit and debt from economic fixes needed for the Covid-19.
And it’s quite amusing to read the Wall Street spin that the strength in the dollar and yields is due to expectations of faster-than-anticipated economic rebound and stimulus taper – when the Federal Reserve keeps saying neither is expected to happen soon enough.
The bigger joke, of course, is to call gold an insurance against geopolitical risk. That’s actually a hangover from the 80s, 90s and even the early 2000s. Geopolitical risk and gold have as much proximity these days as Earth and Saturn. Really, a bomb could go off in the Middle East and the price of gold might actually go down, not up – that’s how much respect there is for the yellow metal’s so-called safety proponent.
The last time gold had a decent pop on a geopolitical event was when U.S. forces took out top Iranian general Qassem Soleimani on Jan 3, 2020. That was at the height of Donald Trump’s grandstanding against the Mullahs and the threat of a counter-strike seemed very real, so gold jumped 2% right after the killing. But with no imminent danger coming from Tehran, that gain was quickly erased over the next few days.
Of course, the pandemic had whittled down all international conflicts to almost zero since then. So, the only geopolitical test to gold since the Soleimani killing came on Nov. 27, during the assassination of Iran’s chief nuclear scientist Mohsen Fakhrizadeh, this time believed by Israeli forces. Gold actually fell 1% at that time.
Aside from being desensitized to any political event, gold prices also haven’t truly reflected the risk to the US economy from the global spread of the UK and South African variants of the virus since December, and the slower-than-anticipated vaccine rollouts.
But more important is the utter lack of correlation between gold and the U.S. fiscal situation. I’ve cited these numbers before and won’t be shy in reusing them because they speak truth to the narrative here:
At a 1.1% yield on the U.S 10-year Treasury note, the annual servicing payment would amount to roughly $370 billion. Right now, U.S. national debt is approaching $28 trillion, and total debt-to-GDP sits at a stunning 146%. The U.S. federal budget deficit itself is already at $4.5 trillion or so, after adding the Trump administration’s $3 trillion plus COVID-19 stimulus for last year. And the Biden administration is pushing for another $1.9 trillion in spending immediately and will possibly seek to do a lot more through the remainder of his term.
If the 10-year note’s yield rate stands at 2%, coupled with a $30 trillion national debt, annual servicing payment itself would amount to $660 billion roughly. Annual deficits will continue to make the national debt stack ever higher.
And while the United States appears to be in the relatively early stages of a monetary expansion cycle, money supply could still increase substantially and set the country up for a return to the 2008/2009 financial crisis days. With the dilution of the fiat monetary system, higher inflation is most certainly on the way.
Indeed, there might be a chance for the U.S. economy to rebound quicker this year than the Federal Reserve says. If that is the case, then there is a chance for inflation to rise too. Historically, gold prices have had a very strong correlation on a long-term basis with monetary base expansion.
Yet, none of these seem to matter now, as gold bears have had a field day for most of the past three months, driving the metal down. Little support has also come from the institutional buyers who were once the bedrock of support for gold, but are now chasing bitcoin and other non-conventional assets like hedge funds.
Gold futures are still in a net long position, with 257,000 lots on the positive side of the trade for the week ended Feb. 2, after a drop of 420 contracts. But holdings in SPDR Gold Trust (P:GLD), the world’s largest exchange-traded fund in gold, have dropped by 9.5% since the 41.12 million ounces recorded on Sept. 21, which was the highest in nearly eight years.
What really sticks out is the apparent determination to keep gold prices down even when the data on some days sometimes scream for a buy. When U.S. nonfarm payrolls showed a shocking 140,000 job-loss for December – the first slump since April – gold actually fell 3.5% over the course of two days as the dollar and yields sprung higher.
In the just-ended week, gold took a 2% pounding after the third straight drop in weekly jobless claims. It should be noted that while claims fell 10% over the three weeks, the actual number of filers remained elevated at near 780,000.
Gold was also pressured by Thursday’s ISM data that showed a 58.7 point-reading that beat market expectations of 56.8 and December’s actual reading of 57.7. In terms of relevance, the ISM numbers pointed to the strongest growth in the services sector since February 2019.
While the dollar and yields may have deserved to rise on those numbers, there’s little justification for hammering gold to lows beneath $1,800 support especially with the Biden administration’s planned COVID-19 relief channeling its way toward Congress – either in its entirety of nearly $2 trillion or the sum of a few parts.
But why do these huge down moves disconnected to the underlying fundamentals in gold keep recurring?
After the August record highs of nearly $2,090, gold only got to as high as $1,973 from Biden’s win in the Nov. 3 election, and to $1,962.50 after Democrats backing the president-elect took control on Jan. 5 of the Senate to facilitate his relief plans for the Covid-19. From then, gold has been in the red as talk of stimulus taper began even before the administration’s first stimulus could be issued.
Much of the blame for the disconnect seems to fall on the banks and major funds that dominate the bullion trade.
Frank Holmes, who heads U.S. Global Investors, said in a speech back in 2019 that gold prices were being manipulated on Chinese markets, which have become the global hub of gold trading, replacing London.
Holmes said the manipulation, or spoofing, in gold typically occurs during the Chinese holidays when trading was thin. He said a large number of contracts will be “flashed” on the markets with the intent to sell. “Immediately the market becomes fearful there is a big seller,” he said. “[Traders] start hitting all their bids, and the price of gold cascades down. It’s fraud. It’s mis-communication.”
Holmes said more oversight was also needed on the role of the Bank of International Settlements, which represents 60 central banks. These banks always seek to buy bullion at the cheapest levels to shore up their reserves.
Back in the U.S., JPMorgan Chase&Co. was fined a record $920 million for spoofing metals trades between 2008 and 2016. A month before that, Bank of Nova Scotia was told to pay $127.4 million for spoofing gold and silver trades in 2018.
So, back to where we began: If you’re going to trade gold, first stop believing in the modern-day fallacy that it’s a safe-haven that will react bullishly to dovish data. Just follow the technical charts that relates to the dollar and yield as well, and you’ll do better.
On the oil front, crude prices got a 9% pop on the week on signs that OPEC and its allies were steadfast in their commitment not to overproduce – for now.
A second straight week of U.S. crude draws also bolstered sentiment. But with prices failing to crack the $60 per barrel resistance on Friday, questions surfaced whether the market was overbought.
Gold Price&Market Roundup
Benchmark gold futures for April delivery on New York’s Comex last traded at $1,815.10, after officially settling Friday at $1,813.05, up $21.80, or 1.2%, on the day.
On Thursday, April gold had tumbled to as low as $1,784.60 on the combination of upbeat jobless claims and ISM data.
For the week, the benchmark gold futures contract lost $37 or 2%.
Oil Price&Market Roundup
New York-traded West Texas Intermediate crude, the key indicator for U.S. crude, last traded at $57.08 on Friday. It officially settled the session at $56.85, up 62 cents, or 2.2%. For the week, WTI gained some 9%.
London-traded Brent, the global benchmark for crude, last traded at $59.56 on Friday. It officially settled the session at $59.34, up 50 cents, or 0.8%. For the week, Brent gained about 6%.
Energy Calendar Ahead
Monday, Feb 8
Private Cushing stockpile estimates
Tuesday, Feb 9
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Feb 10
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Feb 11
EIA weekly report on natural gas storage.
Friday, Feb 12
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.
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