SMM: entering the fourth quarter, the financial market is still very uncertain, especially in the context of the second outbreak of overseas outbreaks, the process of economic recovery may be interrupted. In the face of persistently sluggish economic growth and moderate inflation, loose monetary policy in major economies does not seem to be working well. Fiscal policy is restricted by high public sector debt, high deficit ratio and Bubble expansion of financial assets. In addition, the US election also brings a lot of uncertainty.
Gold has always been regarded as a safe haven and will rise to a certain extent in the event of increased market volatility. Historically, however, the safe-haven-driven gold rally has not been sustainable, and sometimes market panic has led to a sharp fall in gold and other equity assets. For example, the collapse in global financial markets triggered a dollar liquidity crisis, and gold and stock markets fell together.
From the author's gold price analysis framework, in October, due to the overseas epidemic, especially the second outbreak in the United States, weaker economic indicators and financial market turmoil led to the re-expansion of the Fed's balance sheet. The trend of marginal tightening of US dollar liquidity has slowed, coupled with the depreciation of the US dollar and the uncertainty of the US stock election, gold investment demand has picked up moderately, supporting a phased rebound in gold prices. However, due to moderate inflation expectations in the United States and a rebound in nominal interest rates in the United States, real interest rates in the dollar hovered low and did not fall further, which made the rebound in the price of gold highly limited.
Let's take a look at the real interest rate in the US dollar, which determines the medium-and long-term trend of gold. The Fed's balance sheet expanded slightly again last week, but nominal interest rates on the dollar actually rose moderately. And according to the US CPI growth rate in September, it means that it is difficult for US dollar real interest rates to fall further in the short term, making the rebound in gold unsustainable for now. As of October 19, the yield on (TIPS), the 10-year inflation index that measures the dollar's real interest rate, was minus 0.93 per cent, up from above-1 per cent in late August and early September, according to the data.
The current rebound in dollar nominal interest rates seems to have failed to contain the Fed's balance sheet temperature and expansion. Last week, the Fed's total assets expanded sharply by $76.65 billion month-on-month, to $7.2 trillion, and the financial situation in the United States deteriorated, leading to a sharp increase in Fed MBS purchases.
Let's look at inflation. Since 2020, under the influence of the COVID-19 epidemic, the Federal Reserve has launched an unprecedented ultra-loose monetary policy, but it has not significantly raised inflation. The latest data released by the labor department show that US CPI rose a seasonally adjusted 0.2 per cent in September from a month earlier, down from 0.4 per cent in August, and growth has continued to slow since June. This shows that the US economic recovery lacks momentum and indicates that the US may be in ultra-low interest rates for a long time, and the battle between the Federal Reserve and inflation has turned into a protracted war. Affected by scientific and technological progress, global industrial transfer, the decline in total social demand and labor productivity caused by an aging population, sustained monetary easing did not cause high inflation.
Fiscal spending has generally led to a rebound in demand and inflation, but the current round of fiscal stimulus in the United States is deadlocked and limits the strength of the Fed's balance sheet expansion. After the outbreak of the US epidemic in March, the Fed quickly launched a new round of asset purchases and introduced large-scale fiscal stimulus measures. Most of the treasury bonds issued by the government are purchased by the Fed, so if the US fiscal stimulus weakens, the Fed's asset purchases will also weaken.
As for the safe-haven demand brought about by the short-term US election, it does not seem obvious. From the market panic index (VIX), the VIX index dropped after it rose in March 2020, but the center of the VIX index rose significantly than last year, and has never fallen below 20:00. Below 20:00 represents a higher risk appetite in the market, and the market is not panicking. However, we have seen a mild rebound in gold prices in October, even showing signs of peaking. This means that the US election and the second outbreak of the epidemic have triggered a short-term demand for risk aversion in the market.
However, the investment demand for gold is actually hovering at a high level. In October, the author found that under the circumstances of the weakening exchange rate of the US dollar, the aggravation of the overseas epidemic and the re-expansion of the Fed's balance sheet, the investment demand for gold only picked up moderately from August, but did not break the high set in September and actually hovered at the high level.
The weak dollar provides some support for the price of gold. Why did the dollar weaken again in October? The reasons are: first, the US economic recovery has been gradually slowed by the impact of the second outbreak of the epidemic; second, the expansion of US debt and the difficulty of giving birth to fiscal stimulus. On October 8th, the Congressional Budget Office estimated that the US budget deficit would reach a record $3.1 trillion in the recently concluded fiscal year 2020 (October 1, 2019 to September 30, 2020) due to the need of the federal government to fight the COVID-19 epidemic. By comparison, the budget deficit for fiscal year 2019 was $984 billion. Relative to the size of the economy, the deficit as a share of GDP is 15.2%, the highest level since 1945 and has increased for the fifth year in a row. Statistics show that there is a moderate positive correlation between the dollar index and the US fiscal deficit ratio.
Therefore, we believe that the current gold price generally maintains a high oscillatory trend, but due to the continued depreciation of the US dollar against the RMB exchange rate, investors can use the COMEX Shanghai gold futures (SGU) contract and the previous gold futures contract to carry on foreign exchange arbitrage trading, that is, by buying COMEX Shanghai gold futures contract and selling the previous gold futures contract to long the RMB exchange rate. At present, many investors choose to trade Shanghai gold futures contracts (contracts denominated in offshore RMB), which are denominated in offshore RMB, 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.
