SMM News: overseas novel coronavirus vaccine research and development has made progress, reducing the tail risk of economic recovery in the post-epidemic era, investors' risk appetite has significantly rebounded, the short-term market in the trading "cycle recovery" logic, risky assets have been boosted, safe haven assets have become less attractive. The rebound in real interest rates for the dollar and falling investment demand mean that the foundations of the gold bull market have been shaken.
With the progress made in overseas novel coronavirus vaccine research and development, the tail risk brought by the epidemic to economic recovery has declined, market risk appetite has risen, and risk assets with strong cycles, such as bulk industrial products and some cyclical sectors of the stock market, have risen together. Gold, as a safe haven asset, is obviously under pressure.
We believe that the foundation of the current bull market in gold may be shaken, mainly because progress has been made in the research and development of new crown vaccines, reducing the tail risk of economic recovery; second, with the global economic recovery, loose monetary policy and proactive fiscal policy will gradually withdraw, the nominal interest rate of the US dollar will gradually rebound, the rebound of inflation may not necessarily keep up, and the real interest rate of the US dollar will continue to rise. Third, the economic recovery has brought about a rise in the price of risky assets, which further attracts funds to risky assets, and the investment demand for gold continues to decline, which will form negative feedback for gold with rising opportunity costs.
New advances in vaccines lead to a rise in market risk appetite
On November 9th, the first mid-term analysis of the phase III trial of novel coronavirus vaccine released by Pfizer and BioNTech showed that the vaccine was safe and effective, with an effective rate of 90%. Then, on November 16th, Modena announced that his vaccine was 94.5% effective. The (FDA)-related advisory group of the US Food and Drug Administration will discuss the emergency right to use the vaccine developed by Pfizer and Biotech at its meeting on December 10, which means that the vaccine is likely to be approved in the United States at the end of December or early January next year.
In the short term, the author believes that new progress has been made in vaccine research and development, and the tail risk of economic recovery caused by the novel coronavirus epidemic has decreased. Although the epidemic is still spreading in Europe and the United States, the market expects the large-scale launch of the vaccine at the end of December or January to bring the epidemic under control, with investors selling safe assets such as gold and Treasuries and embracing risky assets, such as European and American stock markets and cyclical commodities. Safe-haven assets such as Treasuries and precious metals have been sold off.
The Fed is dovish, but the easing will not be increased in the short term.
On November 6th, the Federal Reserve announced that it would maintain the target range of the federal funds rate at 0.25%, in line with market expectations. The meeting is the first meeting since the general election in the United States this year. In a public statement, the Fed reiterated that interest rates would be kept to a minimum until inflation "moderately exceeded" the Fed's 2% inflation target for a period of time, bringing inflation to an average of 2%, with long-term inflation expectations anchored at 2%.
However, the battle between Republicans and Democrats in the Senate is not over, which has delayed the introduction of the US fiscal rescue package. At this juncture, there is a growing gap between the US Treasury and the Fed, which means that the Fed will not be more loose in the short term unless fiscal policy is on the ground.
Treasury Secretary Mnuchin spoke to the Federal Reserve on November 19, local time, saying that the Treasury would refuse to extend some of the Fed's loan program requirements, which means that a series of Fed facilities supported by the Treasury expires on December 31. Funds to support multiple relief programs will not be renewed. In addition, Mnuchin urged the Fed to return 455 billion dollars of idle funds as soon as possible.
The author believes that the political differences between the two parties have increased after the election, and the possibility of an excessively fast pace of US fiscal exit in 2021 may mean that the nominal interest rate of the US dollar is facing greater and faster rebound pressure. At a time when US inflation rebounded less than expected in October, there is momentum for the dollar's real interest rates to continue to rebound.
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%, near the highest level since late June, according to the data. By November 20th, although the dollar's real interest rate had fallen slightly to-0.86%, it was still well above the July-August level of-1%, which means that the dollar's real interest rate center of gravity is still gradually rising.
Judging from the Fed's balance sheet, the Fed buys $80 billion of Treasuries and $40 billion of mortgage-backed securities every month, but its expansion momentum was much more moderate in November than in March-May. The Fed's balance sheet rose to $7.29 trillion in the week ended Nov. 18, from $7.22 trillion the week before.
Investment demand for gold cools down
From the perspective of the logic of gold price operation, the dollar is the global currency, the dollar interest rate represents the global dollar financing cost, the dollar real interest rate represents the opportunity cost of global gold investment, and the gold investment demand is greatly affected by the opportunity cost. therefore, once the real interest rate of the US dollar rebounds, the investment demand for gold will cool down, resulting in a rise in gold prices that is difficult to sustain.
According to data released by the International Gold Council, investment demand for gold fell significantly in the third quarter of 2020, and the central bank recorded a 10-year net sale. Under the continuing impact of the novel coronavirus epidemic, global gold demand fell to 892.3 tons in the third quarter, the lowest quarterly total demand since the third quarter of 2009. From the beginning of the year to the end of the third quarter, total global gold demand was 2972.1 tonnes, down 10 per cent from a year earlier. Among them, the investment demand for gold, which affects prices, fell to 494.63 tons in the third quarter and 585.5 tons in the second quarter.
The gold holdings of the world's largest gold ETF-SPDR fell to 1220.17 tons on November 20, the lowest since July 21, but still higher than the 891.79 tons in the same period last year. The month-on-month decline in gold investment demand has led to downward pressure or weak fluctuations in gold prices.
In short, the progress made in overseas novel coronavirus vaccine research and development has reduced the tail risk of economic recovery in the post-epidemic era, investors' risk appetite has obviously rebounded, the logic of short-term market "cyclical recovery" in trading, and risky assets have been boosted. The attractiveness of safe haven assets has declined, while the rebound in real interest rates of the US dollar and the decline in investment demand mean that the foundation of the gold bull market has been shaken.
