Asia Gold: Time to stash gold and leg in on drops?

With the dollar still in demand the path of least resistance for gold and silver may be lower, but the downside for both is limited from here. A lot of position length has come off the market, and this reduction may leave both metals a little more stable, as they no longer look anywhere near as over overextended as they did even a week ago. 

Risk-off sentiment favors the USD and USD assets, such as treasuries, but the yield on the US 10-year is down to 0.65%. Lower US nominal yields should eventually begin to kick favorable for bullion given past correlations.

The stimulus tap may need to re-engage again as we turn towards increased Covid-19 cases worldwide; from a US perspective, a larger stimulus package will increase twin deficits and boost gold demand. 

As we approach the US election, gold and silver coin demand, which is rising, may increase further; an article in the Financial Times points to investors turning way from high yield or "junk bonds." This could have a positive impact on gold; USD4.46bn was withdrawn from US high-yield bonds in the week ending September 23 – the worst week since mid-March, according to EFPR.

Recall that gold was also falling very heavily in mid-March but rebounded shortly after, and some of the capital flows fleeing high-yield may find their way to gold.  But gold traders are not looking for a FOMO near-term rebound.

Still, massive monetary accommodation and higher government debt will likely put in a floor on these metals, and I think bullion will hold above USD1,800/oz and push higher nearer the election. Indeed, this should, at minimum, also help stiffen silver and platinum resolve. Palladium will remain more tied to industrial demand, which appears to be improving, especially amid the constructive China backdrop.

The commitment of Traders Report (COT)

The COT reports saw short positions in gold rising to the highest since May 2019, and there are likely a few reasons for this data. Bank traders will never fade a surprise from a central bank initially. Last week Evans threw the proverbial wrench in the AIT debate, although arguably the Fed has fallen well short in explaining what AIT means anyway. But when Evans said it was in the current policy to allow interest rates to move up before the US hit 2% CPI, gold down dollar up.

Over in our woods, the PBoC fixed the Yuan weaker last week, which took the edge of the FX Asia rally, since then short covering. Covid is driving risk-off since the curve steepened in Europe, but everyone would rather own tech as a Covid hedge.

The dollar is trading stronger because some expect a narrowing in the election polls, which could lead to contested results and congressional gridlock; there’s a bit of muscle memory here from the 2016 post-election market re-write where Yankee exceptionalism took over when Trump won.

Still, it might be time to stash your gold in a snug place and leg in on drops. Supposing we manage to make it through the election without a catastrophe and Democrats take the Senate and the Oval Office, demand-side stimulus – and a more redistributive tax regime – could usher in a reflationary macro backdrop like never before. Gold will then moon shot as the dollar will tank.