SMM: spot gold fell below the $1900 mark on Wednesday, hitting a recent three-week low of $1889.84 and is now trading at $1894.40, down 0.91%.

Gold fell nearly $130, or 5.7%, on Tuesday, the biggest level in seven years, and extended its decline on Wednesday, with silver down nearly $4, or 15%. Although fundamentals continue to support gold's rise, as gold rose 35% this year and silver tripled its low for the year, the rapid rise made it necessary for gold to adjust in a short period of time.

With the disappearance of the world's first novel coronavirus vaccine registered in Russia on Tuesday, there was a frenzy of selling precious metals around the world. Analysts pointed out that many gold traders were "looking for an excuse to lock in profits" and found a reason to sell gold after the Russian coronal vaccine was approved.

At the same time, as the market partially digested the increasing impact of new confirmed cases, and recent US economic data continued to improve, it also boosted market confidence. The data showed that gold ETF positions, an important driver of gold gains this year, showed a downward trend, the largest level since March, highlighting the weakening market interest in continuing to increase gold holdings.

However, analysts pointed out that the real rising factor of gold is that the real interest rate in the United States is negative, which is only three times in history, namely, the stagflation period of the post-World War II era in the 1940s and the 1970s and the present. The first two real interest rates have fallen below-3%, while the current real interest rate is only-1%. If it is consistent with the historical trend, there is still room for real interest rates to fall further sharply, so gold's rally is not over yet.

However, analysts also pointed out that the direction of real interest rates still depends on the trend of the Federal Reserve, and as long as the Fed continues to provide stimulus, whether it expands or not, it will lead to further cuts in real interest rates. therefore, the market still needs to continue to pay attention to the performance of US economic data and the trend of the Federal Reserve.

Follow the July CPI data in the United States, if the data further improve, indicating that the Fed's stimulus has had a positive impact on inflation, which may further boost the dollar and put pressure on gold. At the same time, we should also pay attention to the progress of the US stimulus package, if there is no agreement, it will deal a blow to market sentiment and continue to support gold prices.

News of the Russian vaccine prompted investors to sell gold, the biggest one-day drop in seven years.

Gold prices fell 5.7 per cent as investors sold gold and bought risky assets, the biggest one-day decline in seven years, as encouraging economic data and hopes for a new bailout package fuelled a rebound in risk appetite. at one point, the S & P 500 was pushed up to near record highs. Gold extended its decline further on Wednesday, falling below the $1900 mark.

Treasury yields also rose sharply, further hitting the relative value of gold.

Russian President Vladimir Putin says Russia has become the first country in the world to give regulatory approval to a COVID-19 vaccine after less than two months of human trials. Putin said the vaccine was safe and one of his daughters was vaccinated. Edward Moya (Edward Moya), a senior market analyst at Oanda, said in a report that many gold traders were "looking for an excuse to lock in profits" and found a reason to sell gold after the Russian coronal vaccine was approved.

A considerable number of analysts believe that Russia has approved the vaccine before the start of late-stage trials, although this step is considered necessary.

But Moya said: "it doesn't matter if it's a hint to some extent that Russia is just starting the third phase of the experiment." He added that gold was "ready to sell."

Analysts pointed out that at one point this year, gold rose by more than 35%, and the rapid rise made it seriously overbought. From a technical point of view, gold is in urgent need of a correction, but in the context of continued global easing and economic downturn, the market lacks sufficient reasons, so the news of the Russian vaccine has given a considerable number of investors a reason to sell.

At the same time, analysts pointed out that not only gold fell, but the Nasdaq also fell sharply. by comparison, both the S & P 500 and the Dow were higher after the opening, indicating that the market is adjusting the allocation of capital. transfer money from overcrowded assets to other risky assets, so we have seen a rise in US bond yields.

Improved US economic data and a modest rebound in inflation partly eased expectations of more stimulus from the Federal Reserve and supported the dollar

Another factor contributing to the sharp fall in gold prices is the recent improvement in economic data in the United States, which has supported the dollar, which has been at a more than two-year low. In addition to the continued easing of the Federal Reserve, the market is betting that the economic recovery in the United States will be significantly slower than in Europe, which continues to put pressure on the dollar and boost gold prices because the strength of the currency depends largely on the comparative advantage of the economy.

However, the July producer price index ((PPI)), released on Tuesday, rose 0.6% from the previous month, the biggest increase since October 2018 and the first year-on-year acceleration in six months, suggesting that the Fed's stimulus has begun to have a significant effect on inflation, which may ease market expectations of further Fed easing.

Earlier, it was reported that the Fed was considering an "average inflation target" and that if prices rose too slowly for a period of time, the Fed would overshoot in the future to make up for the gap. So with recent signs of a gradual recovery in US inflation, this provides support for the dollar.

In fact, traders' expectations of the Fed's negative interest rate policy are cooling. The federal fund futures contract for December 2021 has now fallen back below 100, indicating that the market expects interest rates to remain positive for the whole of next year, but it is still possible that interest rates will fall below zero in the first half of 2022. Officials repeatedly poured cold water on the idea of negative interest rates in their speeches this month. Dallas Fed President Robert Kaplan said negative interest rates were not a viable option, while Chicago Fed Chairman Charles Evans said it would not be used as a policy tool "at any time."

Follow the CPI data of the United States in the next few days. If the data is better than expected, it indicates a further recovery in inflation and will also boost the dollar to put pressure on gold prices.

Real interest rates reversed for a short time, ETF positions in gold sold off, and market interest in holding gold weakened.

Gold and silver prices fell sharply on Tuesday as the much-anticipated price adjustment dealt a heavy blow to the precious metals market. In just one trading day, the price of gold fell by more than $100 and the price of silver fell by nearly $4.

The sell-off, made up of profit-taking and new risk appetite, accelerated on Tuesday afternoon. However, the fall in gold prices is not surprising, as many analysts have been calling for a correction after gold broke through $1920 an ounce, then broke through $2000, and then continued to hit new highs above that level. It all took less than three weeks.

"Composite precious metals prices performed well during the summer, driven by falling interest rates, steadily rising inflation expectations and a falling dollar," Bart Melek, global head of strategy at (TD Securities) at TD Securities, said on Tuesday. But as the dollar showed some strength and real interest rates reversed, gold plummeted.

"as these drivers lose momentum, this rally is giving up some of its gains," Melek said. Both real interest rates and nominal yields are rising because of optimism and risk appetite about the stimulus package, and the dollar is off its lows. "

This summer, interest in gold has mainly come from Western retail investors, which means profit-taking is highly likely.

"Specs and cta are reducing their exposure to gold and silver as volatility trends rise and take profits from a crowded trade."

Gold ETFs data showed that the world's largest gold ETF-SPDR Gold Trust held 1257.93 tons of gold as of Aug. 11, down 4.19 tons from the previous trading day.

Although it is negligible relative to the continued increase in positions, the recent reduction of gold ETF positions is the highest level since March, highlighting some signs of a peak in the short-term market.

ETF's rapid purchases of gold and silver have been a key driver of this summer's rally, but they are also losing momentum. "interest rates and the dollar are likely to improve in 2020, given that the US economy will continue to actively respond to additional trillion dollars of fiscal stimulus and the Fed's continued measures," Melek said.

Given the technical and fundamental factors, it is not surprising that spot gold fell to about $1890 before hitting further record highs. The only good news for gold bulls right now is that investors have a second chance to enter the market before gold and silver prices hit new highs again, and they are likely to do so this year and next year. The adjustment represents a second opportunity to join the trend of gold and silver. "

TD Securities expects gold and silver to average $2100 and $30 an ounce, respectively, in the fourth quarter of 2021.

The US stimulus package has been slow to reach agreement or deal a blow to market risk appetite

The market is still watching the progress of the US stimulus package.

The standoff between White House Republicans and congressional Democrats over novel coronavirus's rescue plan entered its fourth day on Tuesday, with the two sides not negotiating and each accusing the other of not making concessions. Senate Republican leader Mitch McConnell and House Speaker Pelosi also confirmed the lack of progress in the legislation.

Although the market is still excited about the stimulus, the delay in reaching a bipartisan agreement in the US could make the market impatient and dampen optimism.

Although the S & P 500 was close to a record high on Tuesday, the S & P 500 closed lower as the stimulus package went into labor.

At the same time, Richard Barkin, president of the Richmond Federal Reserve, said that due to the rebound in the novel coronavirus epidemic, the US economy has lost momentum in recent weeks and may need more lasting financial support to mitigate the blow.

"We think the economy faces a pothole, and the stimulus is like a pedal on a pothole that we can move on with," Barkin said at a webinar on Tuesday. "the escalation of the epidemic may turn the pothole into a big pit, so we need bigger pedals. If Congress suddenly withdraws its support, you should guess what trouble our economic car will run into. "

Since the Fed cut interest rates near zero in March, Fed officials have repeatedly said additional financial support is needed as the spread of the epidemic continues to hamper economic recovery.

Some congressional staff speculate that the impasse in the stimulus bill negotiations could last until September. If the speculation comes true, it will add to the policy pressure on the Fed, which will still push gold prices back up.

For the third negative real interest rate in the history of the United States, the long trend of gold may not be over, and the trend of the Federal Reserve is a key factor.

Joe Foster, portfolio manager at VanEck International Investors Gold Fund, said that the gold price correction is only a manifestation of price adjustment, and the longer-term bullish outlook remains unchanged. He kept his target price at $3400 an ounce.

"We have been looking for a correction in the gold market. Nothing goes up forever. Our rally is very strong, well over $2000 an ounce, so we expect some consolidation in the market, and I think that's what we're seeing.

Foster said interest rates remained the underlying long-term driver of bullish gold.

"the first is the interest rate. The real interest rate is negative. When the Fed began to cut interest rates in 2019, they turned negative. Historically, this does not happen very often. Real interest rates are negative after the financial crisis, and you need to go back to the stagflation of the 1970s to find negative real interest rates. The Fed has told us that it will not consider raising interest rates for quite a long time, so I think we will be in an environment of negative real interest rates for the foreseeable future, which is a very good background for gold. "

In fact, historically, the United States also experienced negative real interest rates during stagflation in the post-World War II era of the 1940s and the 1970s. In the 1970s, for example, gold rose more than fourfold at one point. As a result, the current rally in gold is not over yet. Click on the picture to open a new window to view

At the same time, analysts point out that the current situation of negative real interest rates in the United States is likely to worsen compared with the 1940s and 1970s. So the US policy response is to print large amounts of accounts on money to rebuild the banking system and avoid default. With the M2 growth rate of 23% in the United States and no opportunity to raise policy interest rates in the next few years, real interest rates are likely to fall further in the next few years.

During stagflation in the post-World War II era of the 1940s and the 1970s, real interest rates in the United States fell to minus 3%. The current real interest rate is only-1%. Based on correlation analysis, analysts believe that if the real yield falls to-3.15%, gold could be pushed to $3000.

Therefore, we need to continue to pay attention to the changes in real interest rates in the United States, which is the most key factor driving the trend of gold, and if it continues to fall as in historical data, gold is expected to rise significantly further after the adjustment is completed.

TD Securities believes that investors should keep a close eye on the Fed and any possible yield controls, which is a key factor driving real interest rates to negative.

Before gold and silver hit new highs (above $2100 and $30), it needs to be confirmed that the Fed does rein in yields, taking into account the average inflation target, and there are signs that inflation is likely to rise further. At the same time, the market wants to see debt monetisation feasible before it believes that this level will continue. "

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