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Gold steady as default and stagflation risks grow

20 May 2022

Friday 20 May 2022
In this week's market report:
  • Stagflation fears grow in European and Asian markets
  • Spreads increase on 400oz bars
  • Portugal’s central bank opens the vault
  • Russian default risks resurface
Dear Investor,

US dollar gold price [XAUUSD]
Daily chart

Source: Trading View
(Click to enlarge)
Gold rallies: Gold rose 0.50% this week to US$1,842, likely driven by technical buying as the US dollar fell from its two-decade high.
Major index has worst one-day loss since June 2020: Major US indices have had some of their worst falls since the early days of the pandemic.
  • The end of the 60/40 portfolioOn Wednesday, the S&P 500 experienced its worst one-day loss since June 2020, now down 17.5% from its peak this year. As Reuters noted, stocks and bonds are falling together, which is an environment investors aren’t familiar with, writing:
The dual selloffs in stocks and bonds have been particularly difficult on individual investors who counted on a mix of stocks and bonds to blunt declines in their portfolios, with stocks ideally rising amid economic optimism and bonds strengthening during turbulent times.
That strategy does not work when stocks and bonds fall in unison.
Stagflation fears grow in European and Asian markets: Both Asian and European equity markets followed the US’s lead and traded down on Thursday.
  • As noted here, two central bankers suspect the Federal Reserve Bank will slow rate increases from July.
  • European traders are now jumpy and are pricing in potentially four rate increases from the European Central Bank.
So why isn’t gold rising then? Traditionally, when bond and equity markets fall, gold rises. Gold is struggling to catch a leg up. However, as the World Gold Council writes, gold is proving to be valuable as its price falls have been significantly less compared to bonds and equities. Even more so when you look at it in other currencies:

Gold’s performance YTD in global currencies

Source: World Gold Council
(Click to enlarge)
The WGC observes that investors flocked to gold in 2020, and now the yellow metal is continuing with its role of capital protection while being a source of liquidity if needed. Learn more here.
Silver rallies with gold: Silver rallied this week, though struggled to get above US$22.00 per ounce. Ag will need to lift above this level to be short-term bullish again. Palladium’s moves are muted, and platinum remains below US$1,000 per ounce. Bulls, it’s written in the charts: Last week’s prediction of a dip into the US$1,780s was fulfilled on Wednesday this week. It didn’t last, and the long shadow that formed on a candlestick chart suggests there is a reversal for gold ahead. Look for Gold to move above US$1,852.
Not your week, bears: Gold is more likely to fall back into a familiar range if there are any down days ahead. If the yellow metal fails to crack US$1,850, look for a move back down to the US$1820s.
Australian dollar rallies, restricting local prices: The Aussie dollar has rebounded this week, up 1.64% to 70.48 US cents. Gold in AUD sits at $2,616.

Spreads increase on 400oz bars

Gold stored at Bank of England trading lower: As reported here, gold stored at the Bank of England is trading lower, suggesting that central banks are reducing their gold holdings.
  • Spreads on 400oz bars are normally tight, within a few cents.
  • In recent days, these spreads have widened to almost one dollar per ounce.
  • Overall, central banks have been increasing their gold holdings, this selling may be a temporary measure to raise US dollars.
But the recent strength of the greenback has put many central banks in a Catch-22 as they need the dollar to shore up their own currencies to precent imported inflation from making domestic price pressures worse.
With the dollar on track for its biggest annual increase in seven years, many emerging economies whose governments were big buyers of gold are now having to unwind those holdings to shore up their national currencies.

Portugal’s central bank opens the vault

Portugal’s central bank opened up its vault near Lisbon this week, allowing the media a rare peek into what the country’s gold reserves look like.
Banco de Portugal showed off 45% of its total gold reserves. The facility out near Carregado holds 382.6 tonnes of gold, with the remaining 55% mostly stored within the vaults at the Bank of England.
Gold is an important asset for central banks as it is a refuge asset and has no credit risks,’ Helder Rosalino said to the media, a board member of Portugal’s central bank.

Russian default risks resurface

Thanks to extensive government intervention, the Russian ruble has rebounded from its historic post-Ukraine invasion lows.
Since then, the ruble has gone on to make a multiyear high as the Russian Central Bank introduced strict rules, such as exporters required to convert 80% of their US dollar earnings to rubles, adding a 12% tax to US dollar purchases, and banning individuals from taking out more than US$10,000 from the country. In addition to this, foreigners are banned from selling stocks, and Russia is insisting payments be in rubles, with varying success.
The ruble is no longer a convertible currency, so any rally should be treated with caution. However, the worst may still be ahead. With Reuters writing:
Finance Minister Anton Siluanov on Wednesday said Russia would service its external debt obligations in roubles if the United States blocks other options and would not call itself in default. 
Washington is considering blocking Russia's ability to pay its U.S. bondholders by allowing a waiver to expire on May 25, which could push Moscow closer to the brink default.
Read more here and then here.

Inside our office this week…

With persistent turmoil in the share markets, investor interest has been spilt. Many have opted for  ABC Bullion’s Gold Cast 50g bar for those who like to hold physical gold.
Other investors have increased their exposure to gold through ABC Bullion’s Pool Allocated.
Warm regards,
The ABC Bullion Team