Gold 1 OZ (XAU=X) Scarcity Versus the Fed’s Printing Press
Gold futures hit a seven-year high on Thursday as another week of massive filings for unemployment benefits and widespread measures by the U.S. Federal Reserve to reinforce the economy strengthened demand for the precious metal as an investment.
The Fed announced as much as $2.3 trillion in additional aid Thursday, including a pledge to provide stimulus to risky areas of the financial markets that have been hit the hardest by the coronavirus pandemic.
Meanwhile, the number of Americans seeking unemployment benefits topped 6 million for a second straight week, with businesses closed across the country in an effort to stem the spread of the virus. That brought the total claims over the past three weeks to more than 16 million. According to CNBC, if you compare those claims to the 151 million people on payrolls in the last monthly employment report, that means the U.S. has lost 10% of the workforce in three weeks.
Driving gold to its highest level since 2012 were investors seeking insurance against the possibility of further economic slowing, even as U.S. equities rose after the Fed moves.
Easier monetary policy and low borrowing costs is what makes gold so attractive as an investment. Gold doesn’t pay interest like bonds or dividends like stocks, so when interest rates move closer to 0% and some companies start reducing or eliminating dividends, gold becomes a more attractive asset.
What the Experts are Saying
“Unprecedented monetary and fiscal stimulus, negative yielding debt and low interest rates for longer imply gold will continue to attract a flight to safety and quality,” Suki Cooper, precious metals analyst at Standard Chartered Plc, said in a note.
While I understand the fundamental reasons he is stating, I don’t agree with his conclusion that investors are looking for safety in gold. At a seven year high, investors aren’t looking for safety, they are looking for a return on their investment. Any market that has the capability of swinging 5% to 10% per day in either direction isn’t attractive because of safety or quality. Investors like the upside potential and are willing to manage the risk to get it.
Scarcity Versus the Fed’s Printing Press
For centuries, gold has been one of the most sought after assets because of its scarcity. This factor has been underpinning prices also.
According to Bloomberg, the gap between New York futures and spot prices in London is still elevated, a sign of lingering concern over future supply of the physical form of the metal. While investors continue to demand gold, it’s still difficult to ship bullion around the world due to coronavirus-related restrictions. Liquidity is also relatively thin in the market, further exacerbating the price dislocation.
Meanwhile, the Fed continues to fire up its presses and make as much money as it needs to shore up the economy.
What would you rather own? Something scarce or something abundant? This is actually the core reason for gold’s strength.
Overall, the bias in prices is: Upwards.
Note: this chart shows extraordinary price action to the upside.
By the way, prices are vulnerable to a correction towards 1,581.17.
The projected upper bound is: 1,761.87.
The projected lower bound is: 1,605.98.
The projected closing price is: 1,683.93.
A black body occurred (because prices closed lower than they opened).
During the past 10 bars, there have been 7 white candles and 3 black candles for a net of 4 white candles. During the past 50 bars, there have been 29 white candles and 21 black candles for a net of 8 white candles.
Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.
One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 89.3853. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a sell 9 period(s) ago.
Relative Strength Index (RSI)
The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 61.85. This is not a topping or bottoming area. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 16 period(s) ago.
Commodity Channel Index (CCI)
The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 122.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a sell 3 period(s) ago.
The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 13 period(s) ago.
Rex Takasugi – TD Profile
PREC.M.XAU= closed down -7.087 at 1,681.813. Volume was 8,900% above average (trending) and Bollinger Bands were 118% wider than normal.
Open High Low Close Volume___
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period 50-period 200-period
Close: 1,640.10 1,602.97 1,521.55
Volatility: 31 31 20
Volume: 953 191 48
Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.
PREC.M.XAU= is currently 10.5% above its 200-period moving average and is in an upward trend. Volatility is extremely low when compared to the average volatility over the last 10 periods. There is a good possibility that there will be an increase in volatility along with sharp price fluctuations in the near future. Our volume indicators reflect very strong flows of volume out of XAU= (bearish). Our trend forecasting oscillators are currently bullish on XAU= and have had this outlook for the last 5 periods.