Gold price has gained +2.6% since our last update. Less than $1/oz shy of the all-time high, it is likely that yellow metal’s rally will resume very soon. Indeed, expansionary monetary policy, renewed geopolitical tensions in Asia (between North and South Korea, and between India and China, and concerns over the second wave of coronavirus are all favorable for gold’s rally.
Easy Monetary Policy Remains in Place
At the June meeting, The Fed suggested that it would “increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace” in coming months. While the Fed dismissed the possibility of negative interest rate, the median dot plot showed that the Fed funds rate would stay on hold through 2020. Speaking before the Senate banking committee last week, Chair Jerome Powell noted that there is “significant uncertainty” about an economic recovery. Besides purchases of Treasury bonds and mortgage-backed securities (MBS), the Fed has also committed to buy corporate bonds. At the testimony, Powell noted that the market will “dictate the pace of its corporate bond purchases”. Bond yields plunged after the FOMC meeting and weakened further after the testimony. Real yield has deepened into the negative territory after the FOMC meeting. This has supported gold price.
Beside the Fed, other major central banks are maintaining expansionary monetary policies. Last week, BOE increased the size of its asset purchase program by +100B pound to 745B pound. The policy rate was left at record low of 0.1%. Earlier in the month, ECB raised the size of the pandemic emergency purchase program (PEPP) by 600B euro to a total of 1,350B euro. The increase was 100B euro higher than what we had anticipated. Meanwhile, the program is extended to the end of June 2021, and could continue beyond this until the central bank “judges that the coronavirus crisis phase is over”. The deposit rate has been staying unchanged at -0.5% since September 2019. Interest earned from bonds is an opportunity cost of owning gold. As such, the global low yield environment is favorable for gold.
Geopolitical Tensions: Gold’s safe haven appeal is exemplified as Geopolitical Tensions intensified. India-China border standoff started in May has escalated. Fighting on June 15/16 resulted in death of 20 Indian soldiers. According to an Indian Army statement, soldiers “exposed to sub-zero temperatures in the high-altitude terrain have succumbed to their injuries, taking the total that were killed in action to 20″. A reporter at the Global Times, Wang Wenwen, initially tweeted that 5 PLA soldiers had died. The tweet was later deleted. The official Global Times’ tweet “clarified” that it has “NEVER reported the exact casualties on the Chinese side. The Global Times CANNOT confirm the number at the moment”. Hu Xijin, the Global Times’ editor, also posted in the Twitter account that “Based on what I know, Chinese side also suffered casualties in the Galwan Valley physical clash”. No matter what the actual death tolls are on both side, the conflict has raised uncertainty about the stability in Asia and led investors to seek safe haven.
Meanwhile, Korean peninsula tensions have re-surged after Kim Yo-jong, sister of North Korea’s leader, Kim Jong-un, blew up a liaison office for improving communication with the South. At the statement published by the official KCNA news agency, North Korea noted that it had “tragically ruined” the office with a “terrific explosion”. The destruction had come “in the wake of cutting off all communication liaison lines between the North and the South”. While also driven by US-China trade war, tensions between the US and Norther Korea back in 2017 had led to sharp rise in gold price.
Second Wave of Coronavirus Outbreak
Gold’s rally this year has been driven by spread of coronavirus from China to the rest of the world. As the outbreak in China has evolved into a pandemic, the impact on the economy is not only supply chain disruption but also global demand destruction. Recession as a result of the pandemic appears to be a sharp, but short, one. However, the path of recovery is gradual and highly uncertainty. After temporary stabilization in reported cases, resurgence in Beijing, China, has led to renewed lockdown of the city. Meanwhile, several US states have also seen a jump in reported cases over the past few weeks. Reported cases worldwide has reached 9 millions.