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Fundamental Gold Report

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Gold report that enables you to quickly respond to the latest fundamental changes on the gold market. Posted bi-weekly, the Fundamental Gold Reports by Arkadiusz Sieroń, PhD will make sure that you stay up-to-date with the latest fundamental buzz. For all gold investors, who want to know the “why” behind gold’s price swings, our gold reports are a must-have.

  • Gold Declines Below $1,900 amid Stronger Corona and Dollar

    September 24, 2020, 9:50 AM

    The gold price dropped below $1,900 amidst Covid-19 cases increases in the West and the US dollar appreciation. So, what happens next with the yellow metal?

    For the time being, things are not looking good, my bull friends. The bearish trend in the gold market continues. As the chart below shows, we saw a significant selloff on Monday with gold prices decreasing from above $1,950 to $1,909. To make matters worse, the decline continued on Tuesday and Wednesday, with the price of gold dropping below the critical level of $1,900, for the first time since the end of July.

    So, what exactly happened here? Well, as we wrote in Tuesday's Fundamental Gold Report, the coronavirus just came back with another wave. As pointed out in the chart below, the daily new confirmed Covid-19 cases are increasing again in several European countries, and the United States.

    Yes, even the U.K. Prime Minister Boris Johnson has already introduced some new restrictions, including 10 p.m. curfews for pubs and restaurants in England. Can you imagine pubs in England opened only until 10 p.m. - that's not just a crisis, it's a disaster!

    As a result, the recent Covid-19 cases resurgence renewed the global concerns about the reinstatement of lockdowns or other constraining measurements that can hamper the pace of the economic recovery (I warned you that there is no point in expecting a V-shaped rebound). This anxiety caused was the main reason behind the recent stock market declines, pushing down the S&P 500 and Dow Jones from 3319 and 27657 to 3281 and 27148, respectively (see the chart below).

    Moreover, the negative market sentiment intensified U.S. dollar's safe-haven demand, which rose to the two-months high. Consequently, the EUR/USD exchange rate dropped to a two-months low of $1.1671 on Wednesday morning.

    Although the new cases are increasing in America, infections are spreading incredibly rapidly in Europe, strengthening the greenback's position against the euro. The recent cases resurgence across Europe have coincided with the weak economic Eurozone indicators: for example, the business growth ground to a halt in September.

    Implications for Gold

    So, what does the above mean for the gold market? Well, the renewed global concerns about the second Covid-19 wave of infections, primarily in Europe, along with its economic implications, pushed investors toward the US dollar. It is all normal - in every crisis, cash is always the king. But in a global or European crisis such as the current one, the greenback is the tsar.

    Several other risks have accumulated recently. Let's not forget that the U.S. presidential elections are quickly approaching. It is likely that the elections' results will be disputed, as Trump already suggested that mail-in voting could be rigged. Moreover, the fight over Supreme Court Justice Ruth Bader Ginsburg's successor adds up another volatile element, as it decreases the chances of a quick deal on the new stimulus measurements. You see, if Trump manages to install a conservative replacement in time, the new judge could help resolve any dispute in his favor. These risks supported the US dollar, which put downward pressure on the gold prices as a result.

    Therefore, the market sentiment is clearly bearish right now, and it appears that the yellow metal needs a real spark to reenter a bullish trend. Indeed, it seems that both the stock and gold market await patiently for the upcoming fiscal and monetary stimuli. Unfortunately for the gold bulls, the market expectations for a new Congress or the Fed support have declined in recent days. That is why the fears about the second wave of infections and the renewed sanitary restrictions are so acute - there is no government or central bank's help on the horizon that can protect and solidify the economy.

    But still, gold bulls shouldn't give up. Remember the first wave of the pandemic? Gold also plunged, only to soar afterward, resulting in a record high. The fundamental outlook for gold is still bullish: the real interest rates are negative, the public debt is ballooning, while the Fed's monetary policy is very dovish. Although right now, both the Congress and the central bank could potentially disappoint investors, they will have no choice but to provide additional support as they always do indulge the Wall Street - and, although somewhat unintentionally, gold bulls.

    If you enjoyed today's free gold report, we invite you to check out our premium services for richer information. We provide much more comprehensive fundamental gold market analyses in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet, but you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Corona Strikes Back In Europe. Will It Boost Gold?

    September 22, 2020, 5:45 AM

    The number of new daily infections in Europe is rapidly increasing, even reaching new heights in several countries. That is just another reminder that the second wave in fall or winter is upon us.

    Yes, I know. You are all fed up reading about the coronavirus. And yet, the coronavirus is not fed up with spreading around the globe. The number of new daily infections keeps going up, as the chart below shows.

    Most significantly, the coronavirus cases are in a dramatic rise across Europe. The weekly cases have now exceeded the reported levels when the pandemic first peaked in Europe back in March. Furthermore, the number of new daily infections has also reached record highs in several countries, such as Spain or France, as shown in the chart below.

    Without a doubt, the improved testing procedures justify a segment of the infections' rise - but only a part. The death toll is now significantly lower than it was in spring, as the virus started spreading among the younger part of the population, while the healthcare systems are now better armed to handle the epidemic. But still, the WHO warns us that changes will happen as the winter approaches.

    Therefore, if the virus became the new "normal" and people somehow stopped fearing it, that does not mean that the new virus stopped infecting people and influencing economies. Targeted lockdowns and restrictions are already returning across the continent to contain the spread of the coronavirus.

    Hence, even though the gloomiest projections are not yet materialized, and the Fed even revised its economic growth forecast for 2020, the resurgence in new COVID-19 cases across Europe is a harsh reminder that the pandemic is not over yet. With that being said, in the upcoming months ahead, if the case count continues to rise worldwide, the global economic recovery could slow down.

    Of course, there are reasons to be optimistic as well, as better therapeutics, rapid tests, and vaccines are on the horizon. However, the hopes that a Covid-19 vaccine will soon be widely available and solve all the problems are way too optimistic. As Sarah Zhang explains in "The Atlantic",

    A vaccine, when it is available, will mark only the beginning of a long, slow ramp down. And how long that ramp down takes will depend on the efficacy of a vaccine, the success in delivering hundreds of millions of doses, and the willingness of people to get it at all.

    Indeed, billions of vaccine production and distribution across the world will take months, if not years. Moreover, people may still refuse to get vaccinated, given the fact that 20 percent of Americans have already said that they will not take the vaccine, while another 30 percent is unsure, which indicates that the vaccine might not provide the society with the herd immunity.

    Implications for Gold

    So, how does the new coronavirus developments affect the gold market? Well, the coronavirus no longer generates fears and panicking of massive magnitudes as it did in spring. Therefore, the rising number of cases in Europe doesn't significantly affect the price of gold. However, the resurgence of patients in Europe is a brutal reminder that the pandemic is not over yet and that the second wave is only a couple of months away.

    We believe that such a second wave would be positive for gold prices. However, it should include the US as well, as the resurgence in cases limited to Europe could strengthen the greenback against the euro and gold, neutralizing the increased safe-haven demand for the yellow metal.

    If the second wave occurs, it should be bullish for gold not only because of the resulting economic slowdown and increased uncertainty but also because of the new stimulus programs that would probably be announced by both by the central banks and the governments.

    You see, just like drug addicts are desperate for the next dose, the markets are always after more liquidity. It's enough to say that the recent dovish FOMC statement accompanied by fresh dot-plot and Powell's press conference was considered as disappointing by investors and not dovish enough. Both equities and gold declined in response to the Fed's announcement. This is because the central bank did not offer fresh policy measurements and did not expand its quantitative easing program.

    But don't worry - a new stimulus is just a matter of time. The Fed may not care about the gold, but it won't leave Wall Street in need. Gold will benefit from such a noble heart of the American central bank.

    If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • Fed Will Not Hike Rates For Years. Gold Should Like It.

    September 17, 2020, 9:30 AM

    The latest FOMC statement and economic projections signal are that the interest rates will stay at zero until the end of 2023. This is excellent for gold.

    Yesterday, the Fed issued a statement regarding the FOMC meeting, which was held from September 15-16. The US central bank kept the interest rates and the conditions of its quantitative easing unchanged. The chart below shows the levels of effective federal funds rate and the Fed's balance sheet.

    Nevertheless, the statement is changed significantly from the July edition, as it reflects the central bank's new monetary strategy adopted in late August, which assumes the targeting 2-percent inflation over time and not on a yearly basis.

    First of all, the members of the Committee have acknowledged the shift from the flexible inflation targeting into a flexible average inflation targeting that allows the compensation of subdued inflation in one period with higher inflation later:

    The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.Second, and perhaps even more importantly, the Fed announced that the new economic conditions must be met before the interest rates are hiked. Previously, the US central bank would start its tightening cycle when they're confident that the economy "is on track to achieve its maximum employment and price stability goals". Except for this time, the Fed will not move the federal funds rate until the inflation reaches 2 percent and is on track to rise above this level:The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee's assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

    What does the above mean for the gold market? Well, the Fed's statement is clearly dovish as it signals that the Fed will not drop its policy of zero interest rates for years to come. The US central bank made the tightening starts dependent on more rigorous conditions, and since the ultra-low nominal bond yields and the negative real interest rates will stay with us for much longer, investors should get used to them, which should provide support for the gold prices in the process. However, as the statement demonstrates, the Fed's monetary framework's already known changes don't have to affect the gold market in the short-term significantly.

    September Economic Projections and Gold

    Besides their monetary policy statement, yesterday, the FOMC also issued its fresh economic projections. Notably, it is stated that the GDP growth will be higher this year, but eventually lower afterward. Furthermore, inflation will be higher as well, while the unemployment rate lower, as the table below shows.

    In particular, the FOMC expects that the GDP will decrease by 3.7 percent in 2020, increase 4 percent in 2021, and 3 percent in 2022, compared to the negative 6.5, positive 5 percent, and positive 3.5 percent expected in June.

    The unemployment rate is forecasted to be "only" 7.6 percent in 2020, compared to the 9.3 percent seen in June. The fact that the recovery has progressed quicker than expected is bad news for the gold prices. But still, the overall economic activity remains well below the pre-pandemic level.

    When it comes to the PCE inflation, the FOMC now sees higher inflation in 2020 (1.2 percent) than June when they expected only 0.8 percent. However, the FOMC projects that the inflation rates will be below their target until 2023, which is an excellent excuse for continuing their dovish monetary policy, thus supporting gold prices in the process.

    Indeed, the dot-plot shows that the Fed wants the federal funds rate to remain near zero at least until the end of 2023. As Powell stated in June: "We're not even thinking about raising the rates." From a fundamental point of view, this is also excellent news for gold, which flourishes under ZIRP and negative real interest rates. However, besides the fact that the Fed's statement and dot-plot were quite dovish, and especially amid the improvements in the Fed's near-term outlook, the price of gold declined yesterday, which is a bearish performance. It might be the case that investors expected even a much more dovish signal, or they just focused on the fact that the Fed upgraded its economic forecast for GDP for 2020.
  • Will Lagarde and Mnuchin Push Gold Higher?

    September 15, 2020, 9:12 AM

    The ECB held its monetary policy stance steady. Meanwhile, the U.S. fiscal deficit reached its all-time high. What does it all mean for the gold prices?

    On Thursday, the members of the Governing Council of the ECB met together to undertake monetary policy decisions. They decided to leave the interest rates and the conditions of the quantitative easing unchanged. This lack of action was widely expected, so attention shifted to the fresh economic projections and the Lagarde's press conference. Importantly, the ECB lifted its growth forecast for 2020 from -8.7 to 'just' -8.0 percent. With inflation projections almost unchanged, the recent monetary policy statement sounded a little bit more hawkish than the previous one.

    However, the most important part was what Lagarde said during her press conference. Or, actually, what she did not say. First, she did not provide any clues about the expansion or extension of the monetary stimulus. Lack of any dovish hints is supportive for the euro and the price of gold - against the U.S. dollar.

    Second, she did not say that the recent appreciation of the euro constituted a problem. Lagarde emphasized that the ECB is not targeting exchange rates as it is not a monetary policy tool. So, for the Governing Council, the recent euro's rise was generally in line with economic fundamentals. Not surprisingly, after Lagarde's comments that suggested lack of any aggressive measures in order to weaken the bloc's common currency, traders took the euro higher. The appreciation of the euro against greenback is supportive for the gold prices which like the weakening dollar.

    Implications for Gold

    Hence, the latest ECB meeting strengthened the euro against the dollar, which should be welcomed by gold bulls. However, it would be too early that they open a bottle of champagne, as inflation in the eurozone has turned negative, falling from 0.4 percent in July to -0.2 in August, according to Eurostat's flash estimate. With deflation in the euro area, the additional monetary measures are just a matter of time. Moreover, there is resurgence in coronavirus infection in many European countries, which may decrease investor and consumer confidence and hamper the economic recovery. In such circumstances, it is more than certain than Lagarde will ease her stance. It's bad news for gold, as the divergence between the monetary policies in the U.S. and the eurozone will increase, supporting the U.S. dollar against the euro and gold. As one can see, the divergence in the Treasury yields for the United States and Germany has already bottomed out in April and stabilized somewhat since then.

    However, last week Treasury Department published an interesting report that could raise investors' doubts about the strength of the U.S. dollar. It turned out that the U.S. federal budget deficit was above $3 trillion for the first 11 months of fiscal year of 2020, more than double the deficit for full 2019. And with one month to go, September, the fiscal deficit could go even higher, possibly to about $3.3 trillion. In August alone, the U.S. government created debt worth $200 million, as the chart below shows.

    Curiously enough, the government's interest cost to finance is down 10 percent this year, despite the enormous increase in federal debt. Long live low interest rates! Does anyone still have any doubts about the true motives of the ultra easy monetary policy? The very low interest rates do not help anyone but the government! As long as they are low, both Steven Mnuchin, Secretary of the Treasury, and gold are happy.

    If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

  • U.S. Shares Plunged. Is Gold Next?

    September 10, 2020, 8:56 AM

    The U.S. stock market plunged last week. Will gold follow suit?

    Last week, the U.S. stock market has seen strong selling activity. The S&P 500 Index has declined about 7 percent from its peak, while the Nasdaq Composite Index plunged more than 10 percent (entering a correction territory), below 11,000, as the chart below shows. It was the tech sector's worst drop since the end of March, if not the quickest correction ever.

    What did happen? Well, the ultra-bulls would say that it was just a normal correction on the long-term bullish trend. The perma-bears would disagree, claiming that the day of reckoning had finally arrived. But what is the truth? Well, corrections happen from time to time, that's for sure. However, it might be also the case that investors have finally realized that the recovery is much slower than previously anticipated. As we repeated many times, there will be no V-shaped recovery and the economy will not return to the pre-coronavirus levels for a longer time than people thought it would.

    Another issue is that the economic uncertainty has increased recently. First, the U.S. presidential election is approaching quickly and the pre-election period is always a period of elevated volatility (and September and October are also historically months of increased volatility). And now there is an increased risk that the election's results could be contested if there's no clear outcome, because of the expanded voters' access to voting by mail. Second, the U.S. Senate aims to vote today on a drastically scaled-back Republican coronavirus aid bill, despite the opposition from Democrats. The limited aid package or a delayed stimulus could raise doubts about the pace of economic recovery. Third, the Brexit saga stroke back, as new legislation by the British government raised fears of a derailment of trade talks with the EU. So, investors have been reminded that there are several downside risks to economic growth. What a surprise!

    But it seems unlikely that with the current ultra-dovish Fed, which eagerly injects massive liquidity into economy and will maintain interest rates at ultra-low levels for years, the recent correction will transform into the full-blown bear market.

    Implications for Gold

    What does the correction in equities imply for the gold market? Well, the last week was not the best for the yellow metal, as one can see in the chart below. However, gold was relatively stable compared to shares. It makes, of course, sense, as the reckoning of slower recovery and more downside risks than previously thought should be positive for the gold prices, in contrast to equities. So, gold does not have to follow the stock market and plunge now.

    The funny thing is that although gold is often considered to be uncorrelated or negatively correlated with the stock market, we could see upward moves in both asset classes. The reason is simple: the dovish monetary policy with negative real interest rates and massive liquidity should support both equities and the yellow metal. Gold could be also bought as a portfolio diversifier or portfolio's protection amid the rising equity prices and concerns about the sustainability of the Fed-driven bull's party at the Wall Street.

    And I hope that you did not forget about the Fed's revolutionary shift from targeting 2 percent to maintaining an average of 2 percent. Under the new regime, in which inflation above the 2 percent does not have to be a problem, the U.S. central bank would maintain the federal funds rate at ultra-low level for longer, which would increase risk appetite and support more volatility in asset prices and financial imbalances. In such a macroeconomic environment, the role of gold as a hedge against both inflation and stock market volatility could increase.

    If you enjoyed today's free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you're not ready to subscribe yet though and are not on our gold mailing list yet, we urge you to sign up. It's free and if you don't like it, you can easily unsubscribe. Sign up today!

    Arkadiusz Sieron, PhD
    Sunshine Profits: Analysis. Care. Profits.

    -----

    Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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