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Inflation Fears to Stoke Future Gold Prices

26 February 2021

This week the market talk was all about the yield on US 10yr Treasuries surging to 1.6%, the highest in a year. As a result the US market has sold off, particularly for risk assets. This sell off also knocked USD30 off the Gold price, but the AUD also sold off and resulted in a AUD rise of $10 overnight. Proving that Gold investment outside of the US is a currency, as well as a commodity play.

The rise in Treasuries yield has brought out the usual pundits pronouncing coming hyperinflation, which is a bit if a stretch but one pundit who rarely comments but should be listened to, Michael Burry, of The Big Short fame, going a tweet storm warning of coming inflation: 

People say I didn't warn last time. I did, but no one listened. So I warn this time. And still, no one listens. But I will have proof I warned.
The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket#ParadigmShift — Cassandra (@michaeljburry) February 20, 2021

Precious Metals Commentary

Gold continues to take a knock from the rapid rise in US bond yields.
Federal Reserve Chair Jerome Powell gave a largely doveish commentary mid-week that described inflation as ‘soft’ and that it would allow for signs of greater strength in the labour market before tightening. Although many observers have noted the rapid rise in US inflation expectations, it’s worth stepping back and remembering that those expectations are in line with the 2 per cent target and that the Fed is happy to let that target ride a little until aggregate demand remains convincingly strong. Contrary to some breathless commentary out there, these are not Weimar Republic numbers.
Ten-year yields rose by another 25 bps through the course of the week, (open to high) To put that in context, that exceeded the monthly range in 10-year yields in April, May and June 2020. The move to a high of 1.61 % reflects a slightly more than 0.382 % retracement of the huge September 2018 – March 2020 cycle, and the yield hit the Monthly Standard line at 1.56 % …so we may have seen most of the bond-sell off play out? Certainly the 7-day RSI suggests that bonds are in over-sold territory, with yields showing an RSI of 87.40. This is the highest level since December 2016.

What’s the take-away? Short term yields could easily fall again, giving gold a chance to spring higher.  But longer term, don’t underestimate the longer-term impact of this move in bonds, as 12 US$ trillion in Covid-based recovery spending washes through the system and investors look forward to recovery. Additionally, stocks with stretched-looking valuations have taken a hit as bonds weaken.

Prices and key support
Gold revisited the important Weekly Cloud base at US$1760.60 again at the end of the week, and so far, that level has held, with the price making a tentative recovery. Short term the price has scope to recover basis the potentially over-done nature of the bond move.
Gold experienced the third consecutive week of outflows of managed money longs and a sharp increase in short-side bets from funds last week (basis data published since the last report.)  Overall, short positioning remains fairly muted, with short positioning back to October 2020 levels, but 5.80 million Tozs is still low by historic standards. Since Thursday, the 18th through to Wednesday the 24th, CME Open Interest declined by around 1.60 million Tozs, which given the recovery to US$1816 lay in that period, suggests that some of that short position may have left the market on that move.

Gold ETFs contracted by around a million Tozs, in a similar direction to Managed Money holdings.
Silver remains more favoured, drawing on the recovery story and the wider commodity-friendly story expected through 2021. The price is far stronger from a technical aspect relative to gold.
The Australian Dollar
The AUD strengthens on the world recovery story, as the nation’s economy is aided and abetted by the commodity super-cycle narrative, with high iron ore prices leading the way.
This is dividend payment season and as many of the larger resource companies are paying huge dividends in USD which is then converted into AUD the Aussie gets an extra boost this month, with a hat-tip to the economists at ANZ who have been looking at the impact of dividend streams on AUD strength in past years.
The price rebounded fairly well from the last test of the Weekly Cloud base and is likely to do so again. The recovery slightly exceeded expectations, bitting US$1814 on the 24th.

Floats above the Weekly cloud, and recovered above the Weekly Turning Line as the price takes a bid from the worldwide reflation trade that has helped most commodities since January.