Sep 2020


Sep 2020

Weekly markets round-up for StoneX Bullion

By StoneX Bullion

Welcome to a very brief overview of the recent performance in the markets. The essentials are captured in the table below and each week we will show a chart of interest.

We mentioned last week that leading investors Jeffrey Gundlach and Ray Dalio, of DoubleLine and Bridgewater Associates respectively, were speaking publicly during the week. Neither are reported to have made direct allusions to gold, but the gist of what each said can be interpreted as gold supportive. Mr. Gundlach was critical of the actions of the Federal Reserve (U.S. central bank) as buoying asset prices, spurring unsustainable corporate borrowing, with its financial support inflating risk assets and high yield credit markets disproportionately. He also took the view that the inflows into the TIPS indices (bonds that are adjusted for inflationary expectations) have been too strong because they are suggesting that inflationary expectations are too high. Further, he argued that the economic downturn could double the default rate of lower-grade corporate debt, even as the Fed was propping up asset prices, saying that it would only need half of the BBB- corporate debt to be downgraded in order to double the high-yield market.

Given that, as we have also noted before, market multiples are too high in the face of lively risks to earnings, if this were to come about then not only does it raise financial risk in terms of market performance, it also has negative implications for longer-term corporate investments.

All of which is effectively supportive for gold.

Meanwhile Mr. Dalio’s comments about the election were also effectively gold-supportive (hardly surprising given that Bridgewater has over $1Bn in gold ETFs); he believes that spending will increase regardless of the election outcome. A balanced budget, he suggests, is politically impossible because that would either mean higher taxes or reduced spending and in the current environment neither would work. And so, in order to fund increased spending, yet more bond issuance will be necessary and it will have to be on an international basis.

Now if there was a global uptake of such issuance then that would potentially be dollar supportive. But on the other hand, yet more liquidity in the system would ultimately have inflationary implications, especially as the funding that has come into the system from the Fed’s expansion of its balance sheet has, this time, gone through to smaller federal governments and into households (unlike post-Lehman when it was used to bolster the domestic banks’ balance sheets and did nothing for private spending power). It has not yet, however been spent, which means that when confidence finally does return there is pent-up spending potential that, along with supply chain distortions, could well be inflationary. With the need to keep interest rates low (and they are already in negative territory in real terms almost globally and in nominal terms in many countries, especially in Europe), then gold still has its tailwinds.

For now, the market is marking time after the ECB meeting last week and ahead of the Federal Open Market Committee meeting this week, although scrap selling seems to be ebbing away, which suggests in part that the availability of near-market material has been reduced. The 2020 uptrend has tapered off and the price is effectively moving sideways around the $1,930 level but there is an overall short-term downtrend in place.