- March 18, 2021
- Posted by: Amit Pabari
- Category: Commodities
‘Commodity super cycle’, ‘best commodity year(2020) in a decade’, ‘golden days for gold’…. These taglines were used for the performance of Gold at the end of 2020. After a strong rebound across asset classes due to reflationary trade on ultra-loose monetary policy, Gold was seen enjoying its best decade in a year with a whopping return of almost 25 percent in 2020. Other metals were too seen moving towards their multi-year highs. But it didn’t sustain well and started to correct down since the beginning of 2021.
Due to the below reasons, gold seems losing its shine in 2021 and been trading with a negative return of 8 percent to currently quote at $1,730/ounce.
Parabolic rally in US bond yield and Bullish breakout in DXY
It is not nominal but the real yield has a negative correlation with the gold. Since the start of the year, we have seen that real yield is recovering from a bottom of negative 1 percent to now just negative 0.60 percent. The recovery in real yield led to a fall in gold prices as nominal yields are trying to move towards inflation breakeven points. The rising nominal yield also attracts investments and erodes interest rate differentials with emerging markets where carry trades were running higher. This turns the investment regimes back into safe treasuries and resulting into a higher US dollar. The recent breakout in the US dollar index above 91.50 seems convincing and it is expected that it could repeat 2018’s story when DXY consolidated for 10-12 weeks and had given a breakout on the higher side. Here, it is expected that it could move towards 93.50-94.00 in upcoming months.
The attached chart clearly suggests a negative correlation between Yield and gold is likely to continue further as the prospect of a rate hike on the back of higher inflation on strong recovery is increasing.
Stronger US growth forecast on stimulus announcement and vaccine rollout
The US economy seems on its path to have the healthiest recovery not seen even before COVID time after recent stimulus worth $1.9 trillion signed by Joe Biden could support household spending and retail sales as $1,400 credit in account will start churning into the economy. Along with this, President Joe Biden’s vaccination target by 4 July to all US citizens could give a boost to the economic activity. In an environment where growth trajectory is revising higher month-by-month from OECD and other agencies based on vaccination and revival in global demand, it is expected that demand for safe-haven will be evaporated slowly. Further, if we compare the current US yield versus growth forecast, then the gap is wider. It means that yield should follow growth and move higher to compensate for opportunity cost. Further, the fed’s stance will surely leave some clue for tightening in the market. This could be negative for gold as the US dollar index will take charge and move higher.
CFTC data-position suggests traders are reducing longs and increasing shorts
The CFTC (Commodity Futures Trading Commission) disaggregated Commitments of Traders report for the week ending March 9 showed hedge funds are continuously dumping gold as money managers decreased their speculative gross long positions in Comex gold futures by 10,385 contracts to 96,223. At the same time, short positions rose by 6,145 contracts to 66,793. This bearish tone from traders suggests gold is not a good investment for the upcoming month.
In nutshell, a strong global recovery outlook with rising bond yields on prospects of upcoming tightening has led to a fall in gold prices. Furthermore, we say that despite rising inflation fear, gold cannot be a good hedge as nominal yields are also increasing. And thus, from a return perspective, gold may not be much attractive for the traders. The bearish picture for gold is likely to continue further and we are expecting that it will trade in the range of $1650-$1780 zone with mixed to a bearish bias.
-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.