SMM Network: with the end of voting in the US general election, novel coronavirus vaccine research and development has made progress, market concerns and uncertainties have been "eliminated" one after another, the "tail risk" caused by the epidemic has also been offset to a certain extent by optimism, gold as a safe haven asset, the price has fallen sharply. Data show that the December contract of the COMEX gold active contract fell nearly 5 per cent on November 10, while the Shanghai gold futures active contract fell more than 3 per cent on November 11. So how to interpret the trend of gold price in the future? How should investors use gold futures contracts to hedge risk?
At present, the result of the US election is still complicated and confusing.
On November 9th, Pfizer and BioNTech released the first interim analysis report of novel coronavirus Vaccine Phase III experiment, which showed that the vaccine was safe and effective. Combined with the good weekend US election, the global risk assets showed a rapid rising trend.
In the short term, the author believes that new developments in vaccines have reduced market concerns about the tail risks of the epidemic, and that the need for larger fiscal and monetary policies in the future may be reduced accordingly. Investors sell safe assets such as gold and Treasuries and embrace risky assets, such as European and American stock markets and some commodities.
As of November 10, judging from the state voting results, Biden has won the general election. However, Mr Trump has asked Wisconsin to recount (0.7 per cent of the vote) and to file lawsuits in Nevada, Pennsylvania and Georgia on the grounds that there are "illegal issues" in the counting process. In another Georgia, where Biden was narrowly ahead (0.2% of the vote), Secretary of State Raffinspeg said Georgia would recount votes because the two sides were too close to each other in the presidential election. In addition, in Pennsylvania, the difference between Biden and Trump is only 0.7%.
Due to the complexity and sensitivity of the issue, the Supreme Court may not be able to make a final decision before December 8, thus entering the provisional election process in accordance with the 12th Amendment to the United States Constitution. The president is elected by the new House of Representatives, the rule is one vote for each state, and the presidential candidate gets 26 votes or more to be elected president.
In the context of the protracted legal battle, the market uncertainty is so great that the VIX index, which reflects market panic, does not rule out the possibility of a sharp rally, during which gold may benefit from safe-haven demand and rebound periodically.
The aggravation of the epidemic situation in Europe and America brings lagging impact on the economy.
Re-inflationary trading is an important long-term logic for the market to be bullish on gold, but market re-inflationary expectations have cooled significantly due to the intensification of epidemics in Europe and the United States and the difficulty of landing in 2020 under the stimulus of US fiscal policy.
The outbreak of the epidemic in Europe and the United States concentrated in March, and the impact of the resulting blockade measures on the economy was mainly reflected in the second quarter, while the current aggravation of the epidemic in Europe and the United States will have a lagging impact on the economies of Europe and the United States in the fourth quarter and the first quarter
Markets had expected the US to unveil a new stimulus package of more than $2tn early next year, but as things stand, the bipartisan stalemate over fiscal stimulus legislation remains hard to break, limiting the prospect of large-scale government spending. and reduced the likelihood that Congress will provide stimulus measures.
The 10-year break-even inflation rate in the US, which reflects market inflation expectations, fell 1.73 per cent on November 5, the lowest in a month and lower than in January 2020 and 2019, according to the data. The statistical results show that there is a moderate positive correlation between the 10-year break-even inflation rate and gold price in the United States, which reflects inflation expectations.
The rebound in real interest rates in the US dollar suppresses investment demand for gold.
On the one hand, the Fed's monetary policy has entered a wait-and-see period. On November 6th, the Fed announced that it would keep the target range of the federal funds rate unchanged at 0.25%. In a public statement, the Fed reiterated that it would keep interest rates to a minimum until inflation "moderately exceeded" the Fed's 2% inflation target for a period of time. Although the Fed claims to be dovish, it has not increased its easing, and the Fed believes that fiscal policy will play a greater role in economic recovery.
On the other hand, judging from the Fed's balance sheet, the Fed's asset purchase program did not drive its balance sheet to continue to expand, which fell to $7.19 trillion in the week of October 28 from $7.23 trillion the previous week. the Fed will not ease more until a new round of fiscal stimulus in the United States is on the ground. Statistics show that the expansion of the Fed's balance sheet will generally lead to a rise in the price of gold, of course, there are exceptions, such as from 2012 to 2013, the global economy fell into deflation, the Fed's implementation of QE3 failed to curb the economic decline, and the price of gold fell in a deflationary environment. As the Fed's balance sheet shrinks, gold prices are bound not to rise, either down or sideways, and are much more likely to fall. As a result, the Fed's balance sheet fell slightly in the last week of October, meaning the gold rally was hard to sustain.
While the Fed's monetary policy wait-and-see and balance sheet expansion slowed, real interest rates on the dollar rebounded significantly, leading to a significant decline in investment demand for gold. From a historical point of view, the real interest rate of the US dollar is the ultimate factor that determines the price of gold. The rebound of real interest rate will increase the opportunity cost of gold and lead to a decline in investment demand for gold. As of November 9, real interest rates on the dollar rebounded to-0.77%, the highest level since June, according to the data. Meanwhile, holdings of ETF-SPDR, the world's largest gold, fell to 1249.79 tonnes, the lowest since Sept. 21.
Therefore, we believe that the bullish bull market in gold prices may gradually fade and investors need to adjust their trading strategies according to the progress of vaccines and changes in monetary policy. From the comparison between the benchmark price of Shanghai gold and the price of COMEX gold (US dollar), due to the appreciation of RMB, the gold premium in China has dropped significantly, and it is believed that some investors have found the opportunity for arbitrage between Shanghai gold (US dollar) futures and gold futures contracts of the previous period. One of the features of the futures is to hedge against potential downside risks. The data show that the turnover and position of the Shanghai gold futures contract of Zhi Shang have been rising since its launch, and the offshore RMB-denominated contracts are regarded by the market as a supplement to the onshore gold contracts of the Shanghai Futures Exchange or the Shanghai Gold Exchange, which can more effectively cope with short-term gold price fluctuations.
