Gold is holding near its six-year high - TDS

Bart Melek, head of commodity strategy at TD Securities, suggests that despite signals coming from the Fed that a 50 bps rate cut is unlikely in July, ample risk appetite and still relatively firm US economic data, gold is holding near its six-year high.

Key Quotes

“Investors continue to position long in the yellow metal, as the world is increasingly awash in negatively yielding bonds (over $13 trillion), global economic fears continue to rage and there is a broad consensus that the Fed and other central banks will add monetary accommodation, which may include new QE programs.”

“The politically-driven appointment of Ms. Lagarde to replace Mr. Draghi as head of the ECB drove bond yields in southern and western European countries lower, and made many in the market believe that non-conventional monetary policy action from the ECB is likely.”

“This, along with speculation that the US Treasury Department may soon starting following a weak dollar policy is also playing a role in convincing traders that gold should do well into 2020. A potential currency war along with the Trump appointment of relatively dovish FOMC officials are additional reasons markets like gold, despite the recent headwinds.”

“But despite the fact that investors are increasingly struggling to find bonds which yield above zero, gold has not broken through the $1,380-$1,440 trading range. This is very likely due to a well performing high-risk corporate bond market and strong equities, which are increasing the opportunity cost to hold a zero-yielding perpetuity like gold. A well-diversified portfolio holding bonds, equities and high yield instruments still delivers very good returns, making gold (a zero yielding safe haven assets) still very expensive to hold in relative term. And, there is still limited insurance premium assigned to the yellow metal due to low market volatility.”

“Stable inflation and still decent US economic numbers are the key reasons why the US central bank is unlikely to convince traders that its time to go aggressively into simulative mode. For this reason we see gold averaging $1,400 of the balance of the year. Conversely, once equity correction risks and vols rise and as US data starts turning lower convincingly, low Fed rate expectations and insurance premiums should lift gold toward $1,500 in the final months of 2020.”