It used to be that without geopolitical conflicts or domestic risks, the case for owning gold was dubious. Now, even in times of economic peril, the shiny metal no longer seems to be respected as a hedge.
With a record of 2,667 Americans dying a day on the average from the coronavirus since the start of 2021, and the U.S. posting its worst jobs report in eight months, gold finished the first week of the new year with its biggest decline since November.
Both futures and the spot price of the metal, which reflects real-time trades in bullion, lost about 3%, or $60 an ounce or more on the week.
The plunge came as investors pulled money from the so-called safe-haven to plow into Treasuries as U.S. 10-year note yields surged to March highs. The spike in yields threw a lifeline to the battered Dollar Index – the contrarian trade to gold – which rose above the key 90-level.
Friday’s meltdown in gold was unusual given that it came after the monthly U.S. employment report showed a loss of 140,000 jobs in December — the first negative growth of its kind since April.
Typically, when jobs reports are bad, gold acts as a hedge.
This time, however, the narrative was different. Even ludicrous, if you were a believer in gold.
The story on Friday was that with all three legislative houses – i.e. the White House, the House of Representatives and the Senate – coming under his Democratic Party’s control, President-elect Joe Biden will have “stability” of rule that dilutes the need to take cover in safe havens like gold.
Never mind that the incoming president has hinted that his first order of business might be issuing checks of $2,000 for each American hurt by the coronavirus pandemic.
Biden has also said he plans to push out at least two more comprehensive stimulus packages that could add trillions to the U.S. federal debt, already estimated at $3.8 billion for 2020.
In ordinary times, the combined impact of such spending on the dollar logically makes gold a natural hedge.
But these are extraordinary times when logic gets tossed out the window.
Treasury yields jumped 3% on Friday and 21% on the week – the most since the week ended Aug 7, when a similar rally in bonds killed gold’s $2,000 plus rally. The yellow metal has never regained its glory since tumbling from the record high of nearly $2,090 that week.
“There’s speculation that ETF investors are about to abandon the safe-haven trade since the U.S. political situation will see stability with President-elect Biden and as the U.S. begins to speed up their vaccine rollout,” said Craig Erlam, analyst at online broker OANDA.
“Someone big or a hedge fund is abandoning their bet on bullion and that could reverberate further.”
In recent months, ultralow Treasury yields helped fuel demand for riskier assets and led to a surge in borrowing by companies, while homeowners have rushed to refinance their mortgages.
Investors and economists pay close attention to longer-term Treasury yields because they help set borrowing costs across the economy. Earlier in 2020, yields hit record lows as the Covid-19 triggered caused major economic disruptions, prompting the Federal Reserve to keep interest rates at near-zero to limit the damage.
Until Tuesday’s Georgia wins put the Democrats in charge of the Senate, stimulus expectations for 2021 had been fairly small, with Republican fiscal hawk Mitch McConnell poised to block every effort from his rivals.
Now, with Covid-19 measures of any kind expected to pass, bets have swelled for an outsized supply of bonds. This is what caused yields to surge since Tuesday, and part of that strength in bonds spilled over to the dollar, some say.
Fine. But what about the expanded money supply as a consequence of these stimulus? Also, unless the economy and labor market pick up for the Fed to consider raising rates, wouldn’t all that weigh on the dollar? In that case, isn’t gold the appropriate hedge for that? To say no is sheer idiocy because more Americans are eventually going to be rolling their eyes at their out-of-control debt and more investors will likely be looking for “safe assets”, even if they are non yield-bearing. Gold is the natural answer.
Some who exited gold on Friday did so to chase record highs in bitcoin – which has become a renewed craze of speculators after its 2018 mania, drawing as many headlines as Tesla (NASDAQ:TSLA) shares on Nasdaq.
“The institutional interest for bitcoin is starting to really hurt the long-term outlook for gold,” said Erlam, the OANDA analyst.
According to Chamath Palihapitiya, chief executive at Social Capital, bitcoin, also known as BTC, is “probably going to $100,000, then $150,000, then $200,000.” He, however, said it was hard to give a time horizon for the milestones, given the hyper-speculative nature of cryptocurrencies.
Acclaimed Canadian economist, David Rosenberg, has a better take on it.
“Bitcoin is a massive bubble,” Rosenberg said. “The one thing we know about gold, we know the supply curve of gold with certainty. We don’t know the future supply curve of BTC, people think they know but they don’t really know.”
Oil, meanwhile, started the year with a boom, with crude prices ending the first week up 8% as OPEC kingpin Saudi Arabia continued with its lower-for-longer supply strategy.
Since Tuesday’s announcement by the kingdom that it will cut an additional million barrels per day from its production in February and March, the oil market’s attention has been almost entirely on the potential for reduced global supplies.
Lost, or rather overlooked, was the weakening demand for fuels in America, particularly with gasoline demand falling to its lowest since the start of the pandemic. Inventories of diesel-led distillates have been piling up too.
Gold Price & Market Roundup
Gold for February delivery on New York’s Comex did a final trade of $1,846.10 on Friday, after officially settling the session at $1,835.40 an ounce — down $78.20, or 4.1% on the day.
For the week, February gold lost $59.70, or 3.1%.
It was the biggest weekly drop for gold since the week ended Nov. 7, when Pfizer (NYSE:PFE) announced the 95% efficacy in its Covid-19 vaccines that suddenly became a game changer in the fighting against the coronavirus.
The expectation was that 2021 would be a brilliant year for gold. While it may still turn out to be so, the first week of the year had proven excruciating for longs in the yellow metal.
Oil Price & Market Roundup
New York-traded West Texas Intermediate, the key indicator for U.S. crude, did a final trade of $52.61 per barrel, after settling Friday’s official session up $1.41, or 2.8%, at $52.24 per barrel.
For the week, WTI rose $3.72, or nearly 7.7%, for the biggest weekly gain since November.
London-traded Brent, the global benchmark for crude, did a final trade of $56.25 per barrel. It settled Friday’s official trade at $55.99, up $1.61, or 3%, on the day.
For the week, Brent rose $4.45 or 8.6%.
Aside from Saudi Arabia’s announcement of a planned production cut, oil prices were helped by a U.S. weekly crude draw that came in at 8 million barrels – more than three times the level forecast – largely due to destocking by those unwilling to be taxed on barrels in storage. A pick up in U.S. oil exports to China also helped.
Crude prices were also boosted by the annual rebalancing by commodity funds to match the requirement of indexes they were benchmarked against – an exercise that began Friday and could result in the purchase of some $9 billion of oil contracts over the next week.
Analysts said they expected the market to turn back to fuel demand issues in the coming weeks, and also focus on how the United States was coping in its recovery from the Covid-19.
Energy Calendar Ahead
Monday, Jan 11
Private Cushing stockpile estimates
Tuesday, Jan 12
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, Jan 13
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, Jan 14
EIA weekly report on natural gas storage
Friday, Jan 15
Baker Hughes weekly survey on U.S. oil rigs