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Why is gold not at $1,900 this week? Scotiabank points to this reason

Kitco News

(Kitco News) Why didn’t gold prices hit $1,900 on Monday when the yield on the benchmark 10-year Treasury note plunged to a record low of 0.318%?

Gold’s upside potential Monday was limited to its quick overnight gains when the precious metal briefly breached $1,700 an ounce and then declined back to around $1,680. Tuesday afternoon, April Comex gold futures are trading at $1,651.20, down 1.46% on the day.

Many have wondered why gold didn’t rally more on Monday when stocks saw its worst day since the financial crisis in 2008. A lot have pointed to investors needing to sell gold to raise cash to offset losses elsewhere.

Scotiabank also took up this issue in its latest commodities update.

“Despite plenty of pushback (‘why is gold not $1,900 given the massive repricing in nominal and real US yields’? )” the bank’s commodity strategist Nicky Shiels asked.

At the end of the day, gold is a commodity at its “core,” despite also being a safe-haven asset that reacts to macro-economic drivers, such as interest rates, currency fluctuations and risk-on/risk-off sentiment, she noted. 

Gold already had performed better than other commodities due to downgraded global growth outlooks and increasing global stimulus, the strategist added in the report.  

However, the recent oil price crash is putting a drag on prices and seems to be holding gold back.

“Graph 2 highlights gold reaction’s in the lead-up and after the nine episodes in which oil plunged more than 10% in one day. On average, gold is -0.80% (seven days on), and -1.5% (50 days on), confirming that it will be tough for prices to really break out as the general ‘commodity brand’ loses its luster on oils capitulation,” she said. 

Another reason for the stall in gold prices is margin-related gold de-risking, Shiels added.

“Essentially, we chalk it up to margin-related selling, and perhaps CB and/or producer related flows, and when that selling occurs, there is very minimal physical support (as XAUINR & XAUCNH are at ATHs; Asian demand is purchasing food, masks & medicine, not gold jewelry),” she wrote in another report last week. 

“Gold was an equity inflation hedge to higher equities, so with this no longer the case, the risk of ETF or passive positioning unwind is higher and occurring … Cash is usually always king in times of turmoil, not Gold,” Shiels explained.  

On top of that, safe-haven buying is finding other assets to invest in amid the coronavirus fears, such as Treasuries and equity sub-sectors like utilities and staples, Shiels noted. 

Going forward, market uncertainty is likely to continue until there is a “coordinated” response from central banks around the world or a reduction in the number of COVID-19 cases on a global scale.

“Markets remain extremely jittery and keenly awaiting an unscheduled policy decision (more so than scheduled policy meets and data releases),” Shiels wrote. “The decade + buildup of pricing in “bad news is good” for risk assets is now finally tiring because 1) diminishing returns; at some point stimulus is not enough 2) some self-awareness triggered with the last few of the Feds bullets used to fight an event-risk its ill-suited.” 

Scotiabank remains bullish on gold, noting that the market needs switch from “chasing rallies” to “buying dips.”

The bank’s gold price forecast for the year has been upped to $1,750 an ounce with an annual average of $1,650. 

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