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James Hyerczyk

Gold futures are trading higher on Tuesday after hitting a multi-year high earlier in the session. The market is being boosted by demand for assets, not just higher risky assets. Sure there is demand for risky assets amid optimism over a drop in the number of new coronavirus cases at a couple of hot spots in the United States. But there is also demand for gold which some call a safe-haven asset.

At 11:27 GMT, June Comex gold is trading $1707.60, up $13.70 or +0.79%.

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Support from Fiscal, Monetary Stimulus

Gold is being supported because of the tremendous amount of fiscal and monetary stimulus that has been injected into the global economy the past few weeks.


Gold Playing “Catch Up”

One can also say that the rally was been delayed because of the steep plunge in stocks which began a month ago and forced investors to sell gold to meet huge market calls, and that gold is just catching up to where it should be.

Global Rates Near Zero

Essentially, gold is going up because most of the world’s central banks have lowered their rates to nearly zero. Gold doesn’t pay interest but if investors can’t get much of a return on a 10-year Treasury Note, then why not by gold.

Weak Dollar Bringing In New Demand

A weaker U.S. Dollar is also helping to boost foreign demand for dollar-denominated gold. It seems investors aren’t too worried about liquidity anymore so they are selling dollars. Speculators’ net short U.S. Dollar positioning in the latest week touched its highest since May 2018, according to Reuters calculations and U.S. Commodity Futures Trading Commission (CFTC) data released on Friday.

Additionally, as leveraged funds expect the U.S. currency to weaken, the cost to swap Euros into Dollars on three-month basis eased, showing there is “less-pressure” on Euro, Yen and Sterling investors to fund dollar requirements, Monex Europe analyst Simon Harvey said.

Dollar borrowing rates via the 3-month Euro-Dollar FX swap fell to a 12-year low of minus 65 basis points, indicating that European borrowers are able to borrow the greenback at a discount.

Daily Forecast

Although the main trend is up, gold is retreating from its intraday high. This is because investors may be shifting more toward owning stocks on wider optimism that the coronavirus pandemic may be easing.

Stock traders are likely looking at a better economy 3 to 6 months down the road and see more opportunity in the equity markets. Gold is likely to remain underpinned 3 to 6 months in the future, but there may not be much meat on the bone left for investors to drive prices sharply higher. Remember gold is an investment that competes with investment dollars normally earmarked for traditional assets like stocks and bonds.

With gold at a multi-year high, investors have to be careful about buying too aggressively especially if other investors feel that stocks are extremely cheap and have a better potential return.

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