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Gold Prices May Drop as Liquidation Strikes Global Markets Anew

Gold Prices May Drop as Liquidation Strikes Global Markets Anew

GOLD PRICE FORECAST: NEUTRAL

  • Gold prices roared higher after the Fed made its QE program open-ended
  • Mining, minting and refining disruptions see “delivery risk premium” soar
  • Renewed liquidation may trigger reversal amid global recession worries

Gold prices launched a spirited recovery last week, chalking up the largest rise since December 2008 when global markets were churning amid the global financial crisis. The rebound preceded two weeks of intense selling as broad-based liquidation as the swelling coronavirus outbreak seized up credit markets and triggered a stampede to cash.

The rebound came as the Fed made QE open-ended having previously offered a fixed $700 billion program. That seemed to ease investors’ angst, sending gold higher alongside stocks as assets on the chopping block amid panic selling recovered while the US Dollar fell. The moves implied that traders believed in the US central bank’s capacity to keep credit flowing, which also spoke to the metal’s anti-fiat pedigree.

At the same time, supply disruptions were announced from a slew of mines along with the Perth Mint, Australia’s official bullion-making operation, and South Africa’s Rand Refinery, the world’s largest metals processing outfit. That appeared to blow out the “delivery risk premium” as the spread between spot gold and the front-month futures contract ballooned in the latter’s favor.

GOLD PRICES MAY FALL AS MARKET-WIDE LIQUIDATION RESUMES

Interestingly, credit markets themselves were curiously impervious to the Fed-inspired pivot elsewhere across the asset spectrum. The so-called TED spread – a measure of US Dollar funding costs used to gauge liquidity conditions – continues to hover the peaks set amid last week’s cash crunch. That may be as a deep global recession appears increasingly probable.

The Fed’s boldness may have soothed jittery investors for a bit, but its massive stimulus program and a similarly giant fiscal effort will struggle to fuel economic recovery while entire nations are huddled behind closed doors. Cheap borrowed capital and subsidized purchasing power mean little when business has ground to near-standstill in the cause of containment.

The week ahead offers plenty of data points to illustrate the degree of economic pain being felt around the world. PMI surveys from a broad range of major economies are due to cross the wires while the US is set to publish the latest batch of official labor market statistics. If this convinces traders that the road to recovery will be a long slog despite policymakers’ explosive efforts, renewed liquidation may sink gold again.

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— Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

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