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Getting Ready for Growth

01 April 2021

Gold tested the key support levels in the US$1670-1690 band, coming within a whisker of the 12th of March low. The market has recovered by 2 %, most likely on profit-taking by shorts ahead of month and quarter end. The weakness in gold this week was largely exacerbated by US Dollar strength, as the Dollar Index traded up through 93, to peak at 93.437 before weakening slightly on US plans for government spending on transport and other infrastructure related issues.

The other key influence on gold prices, US yields, rose through the week to a high of 1.77 % on Tuesday, before easing minutely to trade at 1.74 % as of now.
Both the rising dollar and rising yields are a headwind for gold right now, and they are acting in concert as expectations of punchy US growth is fuelling the both the rising yields and feeding into the Dollar’s dramatic rise in the first quarter.

The other element of the relentless rise in yields is fear of inflationary pressure rising and getting out of control, at least in the short term. This would be incredibly destructive to fixed-income valuations. At the moment, 5 year forward inflationary expectations have risen to 2.24 % - barely higher than the Fed’s average target, but the drumbeat of inflationary warnings continues to grow.

Bank of America captures the mood of many market analysts when they foresee 2021 as a ‘turning point’ for inflation that could seriously impact stock returns, with real assets, commodities and value stocks all benefitting from the changed outlook. Bank of America chief strategist Michael Hartnett pointed out that “We believe we are at a secular turning point for both inflation & interest rates due to a reversal of deflationary secular factors, fiscal excess, and an explosive cyclical reopening of the global economy creating excess demand for goods, services and labor.” That excess demand element will also combine with post-Covid supply chain friction to increase inflationary risks.

Gold should play its role as a valuable diversifier in portfolios with a valuation that looks relatively unstretched compared with much of the fixed-income universe and equities.
Position-wise, gold investor positioning on futures is relatively unchanged compared with the beginning of the month, at 10.794 million FTozs long. Short positioning on the CME has grown to 6.442 million, a slight increase. These figures are up to the 23rd of March, and we anticipate that Managed Money shorts will have declined by the latest reporting date of March, Tuesday the 30th. Gold ETFs declined by about 3.80 million FTozs over the course of the month.

The essential point here is that both the gold price and positioning is moderate and allows for considerable growth.

Gold re-tests the key supports and holds so far.

Silver has followed gold lower, however silver has met sold support from the Weekly Ichimoku Cloud top, which is now at US$23.78. Despite the recent price decline, silver remains in a medium-term bullish uptrend.

Position-wise, silver has seen a minor reduction in Managed Money length. Managed Money shorts grew more aggressively to the week ending the 23rd of March. Shorts grew by 9.72 million Tozs. Silver ETFs are slightly lower this week, and over the course of the month have declined by almost 39 million Tozs, whilst Managed Money longs exited by almost 20 million Tozs since the beginning of March.
Holds support at the Weekly Cloud top

The Australian Dollar
The AUD traded in a soft manner this week as the US Dollar made a broad-based advance, largely driven by rising yields. Currency strategists at Morgan Stanley see ‘significant uncertainty’ and ‘downside risks for the currency’ in the longer term. The longer-term technical output remains bullish, with strong targets higher, but contains the possibility of a longer-term move to 0.71.