SMM: recently, precious metals have risen rapidly, with gold breaking through its all-time high set in September 2011, while silver once rose more than 20% in five trading days. The bright performance of precious metals has undoubtedly attracted a lot of attention in the market, so what is driving the sharp rise in precious metals? Is there any room for gold and silver to rise in the future?
Risk aversion is not the trigger for the rise.
Recently, friction between China and the United States has escalated. On July 21, the United States asked our country to close the Consulate General in Houston within 72 hours and force its entry on July 24. The Chinese side responded reciprocally on July 24, deciding to revoke the license for the establishment and operation of the US Consulate General in Chengdu, and put forward specific requirements for the Consulate General to stop all operations and activities.
In view of the importance of consulates to economic and trade exchanges between countries, the mutual closure of consulates between China and the United States is undoubtedly an escalating friction between the two countries, but in fact this incident did not stimulate market demand for risk aversion. First of all, the two major indicators of market panic, the TED spread and the VIX index, are oscillating at low levels, and the market risk has not increased significantly. Second, when geopolitical risks rise, investors usually buy assets such as US dollars and US bonds as a hedge and sell equity assets such as stocks, but recently the US dollar continues to weaken and various markets are relatively calm. Finally, gold is a better hedge than silver, but silver has risen more significantly this time, suggesting that the main driver of its rise is not safe-haven demand.
Demand is expected to pick up further.
In terms of time, the accelerated rise in gold and silver began on July 21, and there is no doubt that a major historic event on that day was that the European Union finally passed the economic rescue package after several rounds of consultations. The economic rescue package approved by the European Union includes a 750 billion euro "recovery fund" and a long-term budget of 1.074 trillion euros. Although the EU bill is smaller than the $2 trillion fiscal stimulus bill introduced by the United States in March, the event is of great significance and represents the beginning of EU countries to put aside their differences and work together to fight the recession. Previously, a major problem faced by the EU was the common fiscal problem, especially the occurrence of the European debt crisis made obvious differences within the EU, and the budgets of EU countries, especially those with high fiscal deficits, were subject to greater constraints. To some extent, the economic recovery plan is a new driving force for EU fiscal integration, and it also has a great pulling effect on the economy damaged by the epidemic, which will push the demand side to further pick up.
In addition, the first round of unemployment benefits bill passed by the United States in March this year will expire at the end of July, and a new round of fiscal stimulus bill is under consideration in the United States. Although there are still differences between Republicans and Democrats in the United States, at a time when the unemployment rate in the United States is still high, the market has high expectations for the landing of the bill.
Fed monetary easing brings support
In addition to fiscal stimulus, loose monetary policy has also provided continued support for precious metals. On July 30, the Fed held its policy interest rate close to zero, and the Fed will buy bonds at least at the current pace in the coming months to keep the market running smoothly, basically in line with market expectations. Federal Reserve Chairman Powell said in a speech that the contraction in US GDP in the second quarter may be the largest in history, and that interest rate hikes have not been considered at all, the economic recovery has slowed since June, and the path of economic development is extremely uncertain.
With continued monetary easing, real interest rates in the US have already turned negative and continue to decline, while nominal interest rates remain close to zero, which has led to a rebound in inflation expectations to about 1.5 per cent from a low of 0.5 per cent in March.
To sum up, under the continuing impact of the epidemic, there is still a long way to go for the global economy to return to normal, while the strong stimulus measures of various countries are still falling to the ground, and under the dual forces of monetary and fiscal forces, the bull market in precious metals will continue. Judging from the historical trend, gold has broken through its previous highs, while there is more room for imagination above silver.
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