Crypto- Is It A Bubble Trouble

 Gold prices edged higher during Monday’s Asia-Pacific trade, reaching a four-month high of $1,887 before pulling back slightly. Stronger-than-expected US manufacturing and service PMI data released on Friday boosted the inflation outlook and thus bolstered the appeal of precious metals perceived as an inflation-hedge.

Factors that played a key role in influencing gold prices are very much active in these markets. These factors greatly affect Treasury yields and in turn, the treasury yields affect bullish or bearish sentiment in RSBL gold.

Dollar Weakness - Since the end of March, the greenback, seen as a safe-haven trade, has retreated steadily with optimism about the recovery. But lately, that move down seems to have slowed down as traders begin to anticipate higher U.S. interest rates coming when the U.S. Federal Reserve reacts to signs of increasing inflation. Any important data becomes important for the US Treasury yields that recently weighed on the US dollar and helped the RSBL gold buyers. As a result, Monday’s downbeat figures of the US Chicago Fed National Activity Index backed a corrective pullback of gold.

The US rates fell and dragged the greenback lower after Fed policymaker’s statements. The Fed’s conciliatory remarks boosted the Wall Street indices and capped gold’s upside, as markets once again believed the Fed could maintain lower rates for longer. However, amid a lack of notable US economic news and holiday-thinned trading conditions, gold price stuck to its recent trading range between $1870-$1890, keeping bullion dealers of India at bay.

Inflation - Recently the U.S. Labor Department showed that the consumer price index jumped to 4.2% in April. It is up 2.6% from the numbers revealed in March. Gold steadied near the highest level in over four months as investors weighed comments by Federal Reserve officials who sought to soothe concerns about inflation.

Governor Lael Brainard, Atlanta Fed President Raphael Bostic and St. Louis’s James Bullard said they would not be surprised to see bottlenecks and supply shortages push prices up in coming months as the pandemic subsides and the pent-up demand would be unleashed, but much of those price gains should prove temporary.

Gold is close to erasing this year’s decline as investors turn more bullish on the precious metal, with holdings in bullion-backed exchange-traded funds on an uptrend. While market-based measures of inflation expectations have dipped, traders remain cautious about price pressures as well as flare-ups in Covid-19 cases in some parts of the world.

Bitcoin - We have always seen bitcoin as a reason behind gold’s bearish behaviour. But this time the scenario was completely different. Bitcoin is up nearly 30% for the year but has fallen by almost half from its April record peak of $64,895. The volatility has undermined the case for its mainstream acceptance.

The catalyst for Sunday’s slump was that cryptocurrency “miners,” who mint cryptocurrencies by using powerful computers to solve complex math puzzles, were halting Chinese operations in the face of increasing scrutiny from authorities.

Extreme volatility in the Bitcoin-led cryptocurrencies encouraged traders to look again at gold as capital flows sought safety and stability. Investors weighed uncertainties and risks in trading the digital tokens amid doubts surrounding Main Street adoption and regulatory headwinds. Gold coins in India offer an alternative to cryptocurrencies for investors who are looking for assets that are non-fiat and therefore cannot be diluted by central bank easing.

Looking ahead, this Friday’s US core PCE inflation data will be closely monitored by traders for clues about rising prices levels and their ramifications for the economy as well as the Fed. Core PCE data is a key inflation gauge that the Federal Reserve uses to determine monetary policy. A higher-than-expected print may intensify inflation fears and drive market volatility.

It should also be noted that the Fed speak, coronavirus (COVID-19) updates and US Treasury yield moves will also be important for near term gold prices forecast. Overall, gold remains on the bull’s radar amid inflation fears.

Go For Gold

 As the week opened, Gold was seen climbing to 3 months highs at $1855 as real interest rates on US debt fell to 3-month lows amid a rush to re-impose Covid lockdowns in Asia, where the latest Chinese economic data came in weaker than the analysts' forecast. Spot gold rose as much as 0.2% to $1,870.73 an ounce, the highest since Feb 1 during Monday's trading sessions. 

The spread of the coronavirus was also dragged in some markets, with Singapore reporting the highest number of local infections in months and Taiwan also witnessing a spike in cases.

Gold and gold coins in Mumbai rose to the highest in more than three months as concerns over the pace of a global recovery crept back in following a flare-up in coronavirus cases in parts of Asia.

The second wave of this pandemic has hit India drastically. Families are being wiped out, restrictions have increased and the growth rate has fallen. In fact, it seems that not all the ones, who are affected, are being reported and the ground situation is even worse. 

Furthermore, gold dealers in India are getting a boost from a more downbeat U.S. economic data outlook, which might push gold to $1900 levels. The $1,900 level has been dodging gold since the beginning of January when the precious metal initially began its downtrend, which only ended last month after gold seemed to have found a bottom just above the $1,680 an ounce level. And right now is the time when markets digest several misses on the data front. Market consensus is also likely to downgrade its expectations.

We have always seen an inverse relationship between gold and economic data. Gold and RSBL coins tends to outperform when economic data is weakening and underperform when the economic prospects improve. Economic data expectations are often adaptive, falling sharply following a negative shock such as COVID shutdowns and the accompanying weak data. As the data starts to follow a downward trajectory again and the market enters the corrective part of the data cycle, yields are held down and the USD come under pressure. Low real yields should send gold higher again. All of this could help push gold even higher.

Going forward, investors and bullion dealers in India should keep a close eye on gold's relationship with the U.S. macroeconomic data that have been disappointing recently, especially when it came to the U.S. latest employment and retail numbers.

Investors remain concerned that a sign of rising inflation will force the U.S. Federal Reserve to hike interest rates earlier than expected. However, Fed President Robert Kaplan said on Monday that he doesn’t see inflation becoming a problem anytime soon and reiterated that he didn’t expect a hike in the interest rate until 2022. However, he also urged the Fed to start normalizing policy.

Gold has been in the negative for some time now; however, the recent price rise has put the gold pack into the green and helped it erase this year’s decline. We see several reasons that will bring about a rally in gold -

ETF - ETF investors are starting to swing into net buyers again, after the recent consolidation, and it makes sense for the metals to play catch up to the recent moves higher in other commodities. Investor sentiment has boosted with inflows into bullion-backed exchange-traded funds.

Consumer prices - Further expectations increase in consumer prices as they start to bolster demand for gold as a hedge.

Inflation - The precious metal is a traditional hedge against inflation, which is back with a vengeance. Inflation fears are finally translating into higher precious metals prices.

Pandemic - A lot of uncertainty with Covid-19 strains and mutations in the Asia-Pacific region will lead to safe-haven buying increasing gold prices.

Equities - The gold price usually climbs when stock markets crash. The S&P 500 index of top US stocks blasted through 4,000 for the first time at the start of April, but now looks overvalued as jobs growth disappoints and higher inflation threatens.

Investors, gold dealers and bullion dealers in India now await minutes of the Fed's latest meeting, due on Wednesday, for further clues to the movement of the central bank’s monetary policy. Investors will turn to the minutes from the Federal Reserve’s April meeting due Wednesday for potential clues to officials’ views on the recovery and how they define “transitory” when it comes to inflation. Fed Vice Chair Richard Clarida said Monday that the weaker-than-expected U.S. jobs report for April showed the economy had not yet reached the threshold to warrant scaling back the central bank’s massive bond purchases. Meanwhile, Fed Bank of Dallas President Robert Kaplan said supply and demand imbalances and base effects will contribute to elevated inflation this year, but he expects price pressures to ease in 2022.

While the week is expected to be relatively quiet for economic data, investors will be anxious to see minutes on Wednesday from the Federal Reserve's policy meeting last month, which could shed more light on the policymakers' outlook on an economic rebound.