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'Truly bullish case': Gold price and the 'Japanification of the U.S.' - Pepperstone

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(Kitco News) The case for gold is still a bullish one as it is a hedge against fiscal deficit, fiat currency debasement, global pool of negative-yielding bonds, and possibly inflation, according to Pepperstone. 

The key level to watch in the gold market is a breach of $1,738 an ounce, said Pepperstone head of research Chris Weston. 

“With gold trading a range of $1,738 to $1,678 since mid-April, and the investment backdrop at a very interesting juncture, client interest will ramp up on a closing break of 1738 – where the probability of a continuation of the bullish trend seen between 20 March to 14 April would be fully in play,” Weston wrote in a report on Wednesday. 

From a technical perspective, if gold closes through $1,738, the position remains neutral, which is a very positive sign. “Positioning and sentiment is in no way euphoric, and actually [holds] in quite a neutral stance – giving gold real room, as and when it does move,” Weston clarified. 

On the downside, a break below $1,678 could signal a move to $1,638 an ounce — "the 38.2% fibo of the March to April rally,” he noted. 

Weston’s own prediction, however, is that gold heads higher — “The 5-day EMA is just about turning higher, and instinct tells me if it is going to break, it will be higher, so it’s good to be prepared.”

One key driver for gold is the idea of Japanification of the U.S, meaning that the closer the U.S. gets to the path of Japan, the more bullish the case for gold gets, the report stated.

“The Fed will need to do more and bond yields will stay low, if not head to zero, with ever-flatter yield curves. We’re already seeing the debate as to the merits of the Fed adopting negative fed funds rate, although this would require a legal change to the Federal Reserve Act,” Weston said.

The key thing to consider is how gold will do in an environment where the U.S. Treasury Department borrows $2.999 trillion this quarter to fund U.S. fiscal measures.

“This is just such a staggering amount to raise from the bond market, and for context is some six times the previous record we saw in 2008,” Weston said. “Gold traders … care about is how easily this level of debt is absorbed by the private sector or foreign governments and ultimately if it causes gyrations in the bond market.”

Coronavirus stimulus spending is targeting programs that would help prevent a depression, not create productivity or boost investment. “Government debt-to-GDP is going to be closer to 130% this year and that puts the US on a similar trajectory as Japan,” Weston said. 

This is where the inflation versus deflation debates comes in.

“Bond yields should rise given the massive funding task of the U.S. government, but that depends on whether we see inflation or deflation, and, of course, the level of bond purchases from the Fed to keep yields anchored. Yield curve control would be one answer to keeping yields suppressed (think BoJ),” Weston explained. 

Gold is looking like a great hedge in this coronavirus and post-coronavirus environment, according to Weston.  

"Gold … is a hedge against a blow out in the fiscal deficit, it is a hedge against central bank experiments and fiat currency debasement and in for 2020 perhaps a hedge against a re-focus on the global pool of negative-yielding bonds. However, if we head into 2021 and beyond, perhaps one day it will be a hedge against inflation, but it will not be good inflation,” he wrote.  

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