Gold hit the biggest one month decline in three years. Whats next?

category:Finance
 Gold hit the biggest one month decline in three years. Whats next?


After the continuous rebound of gold price this week, the discussion on the future market of gold has become hot again. The weak trend of gold, commonly used to fight inflation, in the past two months also suggests that the future economic recovery is hindered. The key factors that influence the trend of gold bull and bear market include not only the long-term indicators such as the US economy, real interest rate and the long-term purchase of gold reserves by the central bank, but also short-term factors such as the US dollar index, inflation level and geopolitics.

Novel coronavirus pneumonia vaccine will accelerate in the short term and the US dollar index will be adjusted by a hedge buying. Gold prices will undergo some adjustment in the near future. Gold prices have been nearly 8% when they hit a historical high of $2075. The consultation on the new round of stimulus package led the gold price to rebound more than 1% on Thursday (1), return to the 1910 dollar mark, or hint at a short-term pullback. end.

If gold is bullish for a long time, it will be a good buying opportunity after gold callback. Wells Fargo believes that the fall in gold prices in the past month is mainly due to the relatively strong performance of the US dollar, which is a good buying opportunity in the current gold market. It is expected that the gold price will rise to 2200-2300 US dollars / oz by the end of 2021.

Gold is likely to return to around $2000 an ounce by the end of 2020, said Kelvin tay, UBSs CIO for global wealth management. Investors should now partially allocate gold, which is a very good hedging tool under the impact of risk events such as the US election and the epidemic.

At present, many central banks adopt loose policies to deal with the impact of the epidemic. The long-term real interest rate remains low. The yield of 10-year US Treasury bonds is 0.6%, and the yield of European bonds is basically negative. The opportunity cost of holding gold is low. This is similar to that of the 2008 financial crisis.

After the 2008 crisis, countries also choose to increase monetary policy stimulus to reduce the impact of the subprime mortgage crisis on the financial system. The Federal Reserve started the journey of quantitative easing (QE), and began to implement QE1 in November 2008. It also lowered the federal funds rate to 0-0.25% in December, which is consistent with the current level of the federal funds rate. At that time, gold prices began to accelerate, rising from an annual low of $682 / oz in October of that year to $1921.1/oz in September 2011. In the past three years, gold prices have risen by 181.6%, which experienced the QE1 and QE2 of the Federal Reserve. After 2011, the Fed maintained interest rates close to zero and continued to push ahead with qe3 and qe4. Since 2014, the European Central Bank and the Bank of Japan have successively implemented negative interest rate policies, and the global scale of negative interest rate bonds has increased rapidly, further reducing the opportunity cost of holding gold.

This stage is also a period of liquidity flooding. Central banks have increased monetary easing to hedge the negative impact of frequent economic and financial crisis, terrorist events and geopolitical crisis. In the long run, inflation expectations rose, real interest rates fell, and the US dollar index weakened. Gold showed a bull market trend.

On the contrary, many central banks, including the Federal Reserve, have been stressing that they should maintain easy interest rates for a long time to get through the crisis. In early September, the Federal Reserve Open Committee (FOMC) voted to keep interest rates at 0% - 0.25%, and said it would keep interest rates low until inflation rebounded.

Fed officials have also revealed in recent speeches that it may take about two to three years for low interest rates to continue. Novel coronavirus pneumonia (RobertKaplan), Dallass Federal Reserve Chairman, said Wednesday (30) that keeping interest rates at close to zero for three years may be appropriate, helping the us recover from the new crown pneumonia pandemic. Kaplan,

I think we need to keep the Feds funding rate at zero for the next two to three years until the economy is on track, Kaplan said. It may take so long to get through the crisis and meet the Feds full employment and inflation targets. With a new policy framework and inflation targets, I think the Fed will be more relaxed than ever. The problem is that the current interest rate level leaves little room for the fed to maneuver on monetary policy, but I am sure that central banks will continue to adopt a relaxed attitude in response to the epidemic.

The timing of US fiscal stimulus plan will affect the gold trend

Next, whether the gold price will continue to fluctuate or start a new round of upward trend depends on the sincerity of the US Treasury Departments new round of stimulus plan.

At present, the financial stimulus plan to deal with the epidemic situation has been under negotiation, but the results are not obvious. House Speaker Nancy Pelosi and Treasury Secretary Steven mnuchin failed to reach a consensus on a stimulus package in a meeting for more than 90 minutes on Wednesday. The two will continue to discuss and try to work out a plan that will pass both houses of Congress.

The talks have led to a consensus between Republicans and Democrats on direct subsidies, small business loans and aviation aid, but they still need to resolve the differences between state and local governments on corporate aid and corporate debt protection. At present, the two sides are in a stalemate over the amount of stimulus package. The size of the rescue bill proposed by the House Democratic Party has dropped from the initial $3.4 trillion to the current $2.2 trillion, but the Republican Party is only prepared to provide a package with a ceiling of $1.5 trillion to deal with the Democratic Partys proposal. If the two sides fail to reach an agreement this week, the stimulus bill may be delayed until after the November election, or even after the formation of a new Congress in January next year. If so, gold may continue to fluctuate in the fourth quarter. Source: Zhang Mei, editor in charge of Finance and Economics_ NF2100

The talks have led to a consensus between Republicans and Democrats on direct subsidies, small business loans and aviation aid, but they still need to resolve the differences between state and local governments on corporate aid and corporate debt protection. At present, the two sides are in a stalemate over the amount of stimulus package. The size of the rescue bill proposed by the House Democratic Party has dropped from the initial $3.4 trillion to the current $2.2 trillion, but the Republican Party is only prepared to provide a package with a ceiling of $1.5 trillion to deal with the Democratic Partys proposal.

If the two sides fail to reach an agreement this week, the stimulus bill may be delayed until after the November election, or even after the formation of a new Congress in January next year. If so, gold may continue to fluctuate in the fourth quarter.