The Week Ahead: Always believe in Gold?

“It doesn’t do anything but sit there and look at you” is how the Sage of Omaha, (aka Warren Buffet) has described his contempt for gold as an investment. He sees it as lacking in any real value due to a simple lack of usefulness. On the other hand, Buffett says silver serves many purposes and supplies practical needs that people have. What the legendary investor would have made of this week’s price action in both metals would therefore be fascinating.

Gold plunged by 5.7% on Tuesday, while silver plummeted by almost 15% as a rally in US Treasury yields and a rebound in real yields weighed, along with another bout of increased risk appetite. The biggest sell-off in seven years comes after a 30% rally in the yellow metal this year driven by concerns over the impact of the pandemic, especially in the US and the vanishing income available from safe haven assets such as government bonds. 

The move north in bond yields has been significant with the US 10-year Treasury yield rising to 0.65%, the highest level since early July. This has been driven by a push higher by both real interest rates as well as breakeven inflation expectations, which is taking its toll on FX markets with USD/JPY now trading firmly above the 106 level.

Further economic stimulus in the US is still in play, even though lawmakers on both sides of the aisle are at loggerheads, while optimism over tax relief and news of a potential Covid-19 vaccine from Russia prompted investors to take money from havens and move it into riskier assets.

That said, the fundamentals for gold are still enticing for thebugs who may have missed the first move above $,2000. US real yields – the return one can expect once inflation is taken into account – are still trading deep in negative territory so these need to reverse much closer back to zero to see furtherselling. Indeed, after such a powerful surge over recent weeks with 14 up days out of 15 since breaking out in mid-July, it’sonly natural to see some retracement of prices. 

While global bonds have been mostly weaker this week, the clear exception is NZ government debt after the RBNZ increased its QE programme through more purchases and extended bond buying until June 2022. The clear signal from the bank’s discussions was that they favour implementing negative rates combined with QE, if further easing is required. ‘It was difficult to imagine a more dovish outcome than we have seen,’ said one prominent investment bank and with interest rates expected to go lower, NZD should be under significant pressure over the coming weeks.

One final word for the depressing UK GDP data which has dominated the headlines as expected. Importantly, the monthly figure for June saw a much more solid rebound than in May and more is expected in July which means the third-quarter rebound may outperform other economies. That is not to say that a full recovery is close at hand, as the economy by most estimates is still set to be as much as 10% smaller at the end of the third quarter than pre-Covid.