FxWirePro: Historics, Geopolitics Add Turbulence To Gold Prices, Uphold Long Hedges As Festive Season Stimulates Bullish Risks

We are witnessing 4th consecutive days rallies in gold’s (XAUUSD) price. Bulls accumulating and currently trading at around $1,499 an ounce (while articulating) upon intensified buying momentum on various driving forces.

Amid simmering geopolitical turmoil, on both sides of the Atlantic, gold prices largely shrugged, ending last week down 1.3%. 

While weaker oil prices helped drag US 10Y break-evens lower by around 7bp, leaving US 10Y real yields actually 3bp higher on the week, despite nominal yields also moving lower. 

With regards to geopolitical risks, Speaker Pelosi's impeachment inquiry into President Trump likely adds some further upside risk bias for gold prices on net, but the takeaways are not straightforward. As our cross-asset strategist points out, the market outcomes of the last two impeachment processes are likely too context-specific to graft easily onto the current saga. For gold specifically, the beginning of the disintegration of Bretton Woods with Nixon's August 1971 decision to end USD/gold convertibility heavily skewed gold’s rise over his subsequent impeachment in 1973-74. 

More recently, Clinton's impeachment was almost a non-event for gold, with prices falling about 2% before the anticipation of 1999 Fed hikes led to more material weakness (Normand, Rough House, 25 Sep). In a slightly different analysis, our rates strategists do point out that 10-yr yields have declined roughly 30bp on average over the last two major US presidential scandals (Iran-Contra and Clinton impeachment) after adjusting for the level of front-end yields (Barry et al, Treasuries , 27 Sep). If anything, escalating political risk could add further downward pressure to their fundamental view already biased towards lower yields based on weaker growth prospects and the likely end of reserve run-off by the Fed. 

Whatever be the driving forces, the underlying price of any asset class is a function of demand/supply equation ultimately.

While the demand for bullion space appears to be down-casted in Asian regions on account of economic slowdown, natural calamities in countries like India and most importantly, rising prices have all hampered the consumer buying sentiments, even if attractive discount offers is luring buying interests on the eve of the major festival season in the region.

Bullion prices in India (Gold & Silver futures), the one of the largest bullion consumers after China, is trading at around Rs.37,949/10 grams at MCX (while articulating), easing from a 37,990 previous close.

As we could foresee more upside risks in the days to come, on hedging grounds, we advocated long positions in September’19 month’s COMEX gold contracts. We now like to uphold the same strategy by rolling over the contracts for November delivery as we could foresee more upside risks amid global financial crisis. Buying interests are mounting on safe-haven sentiments amid global slowdown which is still imminent. Courtesy: JPM