Why Is Safe-haven Gold Not Safe Now?

Winkelmann

Commodity

Palestinian-Israeli conflict

Central Bank

Summary:

Gold plunged along with the stock market, all for the sake of cashing out.

The U.S. nonfarm payrolls data for July was unsatisfying. A set of weak economic data triggered the market concern of a recession. Besides, the ongoing appreciation of the Japanese yen has led to the unwinding of yen carry trades, causing severe turbulence in the financial markets and a widespread decline in global stock markets. Investors are urgently seeking safe-haven assets. However, in this scenario, gold, traditionally considered a safe-haven asset, has not become the market's preferred choice but collapsed after panic selling.

Inexplicably, Iran vowed to retaliate against Israel after the assassination of a Hamas leader, sparking fears of a broader war in the Middle East. Geopolitical tensions heated up sharply. Yet, this did not shore up gold prices.

Liquidity Scramble

In fact, safe-haven buying of gold tends to exhibit fatigue, meaning that even worse news is needed after bad news to drive gold prices higher. Iran's hesitation between retaliation and restraint, and the uncertainty of the timing of any strike against Israel, have somewhat alleviated concerns over geopolitical tensions.

It is clear that the recent severe turbulence in the financial markets has indirectly triggered a liquidity crisis. This liquidity shock has caused a decline in nearly all financial assets, including gold. The non-farm payroll data seems to have shifted the market overnight from "rate cut trades" to "recession trades."

As an asset that does not generate cash flow, gold's price movements are entirely dependent on market supply and demand, which can make investors cautious during times of uncertainty. While the poor performance of gold prices may seem surprising, it is reasonable as all assets are being sold off. The liquidity crisis forces investors to liquidate or reduce their gold holdings to obtain liquidity to cover losses in other assets or meet margin calls. Additionally, when financial markets seek hedging instruments, they may establish short positions to hedge against previous long positions, further depressing gold prices.

Moreover, heightened expectations of rate cuts have made gold-long trades highly crowded, increasing liquidity risk. When many profit-takers try to sell assets simultaneously, they struggle to find enough buyers, turning it into a race to sell first, causing sharp price declines.

Another reason for gold's decline is the rise in the U.S. dollar index and Treasury yields. This highlights that during the extreme market panic, the preference for cash often prevails. From a trading perspective, the market typically buys gold during pessimistic times and sells it during desperate times (along with other non-cash assets), showcasing the dual nature of gold's safe-haven properties.

Looking back over the past forty years, global risk events like wars and financial crises have not had a simple and direct impact on gold prices. During the 2008 financial crisis, U.S. stocks were down almost all year, and gold also plummeted by over 30%. It was the massive rush for liquidity that drove this trend.

Is Gold's Bull Market Over?

Looking back, risk aversion caused by unexpected events can only cause short-term fluctuations in the price of gold. The gold's medium- to long-term bullish market is always formed in an environment with low interest rates and a weak U.S. dollar.

From a fundamental point of view, although the weak economic data has increased the risk of a recession, the market is clearly overreacting. The U.S. economy may slow down, but a recession is not very likely. A single data point cannot rule out the influence of "coincidental" or "temporary" factors. While a Fed rate cut is expected, it's unlikely to necessitate an urgent and significant reduction.

The ongoing decline in U.S. inflation and the rising unemployment rate are paving the way for a Fed rate cut. Historically, both relative and absolute returns on gold have been substantial around Fed rate cuts. If the Fed proceeds with a rate cut, the gold market may gradually return to its traditional pricing logic, where gold prices and the real interest rate of the U.S. dollar are inversely correlated, with lower rates providing long-term support for gold.

Furthermore, from a geopolitical perspective, the intensifying global geopolitical tensions and the growing demand for diversified reserve assets have fueled continued gold purchases by central banks worldwide. And the rising uncertainty around the U.S. elections is also boosting safe-haven demand for gold.

The recent sharp correction in gold may have been somewhat overdone. Once the panic subsides, we might see a renewed wave of buying. This is reminiscent of the panic-driven selloff in March 2020 during the onset of the COVID-19 pandemic. Once the liquidity crisis began to ease, gold rebounded quickly, supported by monetary easing, hitting a bottom and continuing its upward trend.

As for whether gold can reach a new all-time high, it may just be a matter of time.

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BOJ

Remarks of Officials

Central Bank

On August 8, the Bank of Japan released the Summary of Opinions at the July 31 Monetary Policy Meeting. The main points are as follows:

Economic Developments

Japan's economy has recovered moderately, although some weakness has been seen in part. Structural issues of Japan's economy lie in subdued consumption due to the declining birthrate and aging population, and the industrial structure generating low profits. It is likely to keep growing at a pace above its potential growth rate, as a virtuous cycle from income to spending gradually intensifies.

Although private consumption has not been so strong, it is likely to remain resilient. Not only is this due to factors such as cuts in income tax and inhabitant tax, but it is also because the results of this year's annual spring labor-management wage negotiations are likely to be further reflected in wages.

Prices

Underlying inflation, measured by the Consumer Price Index (CPI), is expected to increase gradually. In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target. The results of this year's annual spring labor-management wage negotiations have started to be reflected in the statistics. A virtuous cycle between wages and prices has likely begun to operate, and underlying inflation has shown steady progress toward 2%.

Upside risks to prices require attention since a rising number of industries have seen supply shortages and excess demand as a result of labor shortages. In addition, import prices have risen due to overseas inflation and the past depreciation of the yen.

Monetary Policy

Japan's economic activity and prices have been developing generally in line with the BOJ's outlook. The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require attention. It should be noted that raising the rate at a moderate pace means an adjustment in the degree of monetary accommodation in accordance with underlying inflation, which will not have monetary tightening effects. Even if the BOJ raises the policy interest rate, the nominal interest rate will continue to be at a highly accommodative level of 0.25 percent, and there is no change in the Bank's stance to firmly support the economy.

Assuming that the price stability target will be achieved in the second half of fiscal 2025, the BOJ should raise the policy interest rate to the level of the neutral interest rate of 1% toward that time. After this meeting, if it is confirmed that prices will develop in line with the BOJ's outlook and that positive corporate behavior -- such as solid business fixed investment, sustained wage hikes, and a continued pass-through of cost increases to selling prices -- will be maintained, it will be necessary to proceed with further adjustment of the degree of monetary accommodation as appropriate.

Summary of Opinions at the Monetary Policy Meeting

Risk Warnings and Disclaimers

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FXCM

Central Bank

Forex

Economic

USD/JPY Analysis

The Japanese central bank had adopted a slow and timid path away from its ultra-loose setting, which had failed to stem the Yen's demise, but bolstered its normalization efforts last week. It hiked rates again, pointed to more moves ahead and announced a sizeable reduction to its bond buying scheme.

Friday's soft US employment report stoked fears of recession, sent global markets into panic mode and led to calls for aggressive rate cuts by the Fed (of at least 100 bps in the next three meetings), which had earlier opened the door to a September pivot.

These developments accelerated the fall of USD/JPY, which lost more than 5.5% within four days and erased most of this year's gains. The shift in monetary policy dynamics can further pressure the pair towards 140.26 and beyond.

However, market recession fears and pricing around the Fed seems exaggerated. But even if the Fed slashes rates multiple times and the BoJ raises them again as indicated, the interest rate differential is still large and could continue to support the pair. Furthermore, Japanese policymakers are unlikely to become too hawkish and the market turmoil will give them pause. In fact, Deputy Governor Uchinda downplayed prospects of further hikes today, saying that the central bank "will not raise" interest rates "when financial and capital markets are unstable".

This commentary helps USD/JPY rebound and give it the opportunity to tackle the 38.2% Fibonacci of the recent slump. However we are cautious around the ascending prospects, as the road ahead contains significant hurdles. Strong catalyst would be needed to surpass the resistance cluster provided 50% Fibonacci and 200Days and 200H4 EMAs (blue and black lines respectively). USD/JPY Rebounds from Sell-off after Supportive BoJ Remarks_1

USD/JPY Rebounds from Sell-off after Supportive BoJ Remarks_1

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Samantha Luan

Economic

Forex

XAUUSD trading key points

Market focus: markets are under pressure from weak US employment dataCurrent trend: gold is undergoing a downward correction as part of a long-term uptrendXAUUSD forecast for 7 August 2024: 2,417 and 2,380

Fundamental analysis

XAUUSD quotes have undergone a downward correction on the daily chart, falling below 2,400 after rising to an all-time high of 2,483 USD amid weak US employment data. This decline may be attributed to profit-taking by buyers and local strengthening of the US dollar against other currencies.

Overall, the potential for XAUUSD growth remains as the US dollar will soon come under pressure from an interest rate reduction. Given gold's status as a popular safe-haven asset, another round of geopolitical tensions in the Middle East may positively impact gold prices.

XAUUSD technical analysis

XAUUSD quotes are currently hovering just below the 2,400 level, where bulls are attempting to push the price higher following the downward correction. The trend remains upward. However, whether the downward correction will continue or end at these levels remains to be determined.

The 2,453-2,463 USD area is now vital support. The short-term XAUUSD price forecast suggests that the downward correction could extend if bears break through this level, potentially reaching 2,300. Conversely, if bulls push the price above 2,400 USD, XAUUSD could rise to the 2,417 resistance level and higher. Gold (XAUUSD) Undergoes Downward Correction, But Growth Potential Remains_1

Gold (XAUUSD) Undergoes Downward Correction, But Growth Potential Remains_1

Summary

After testing an all-time high of 2,483 USD, gold corrected downward. Growth potential remains as long as prices stay above the 2,453-2,463 USD support area.

Source:RoboForex

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Damon

Economic

Investors in large consumer-goods companies are having to up their stock-picking game, as a post-pandemic spending splurge dries up and increasingly price-sensitive shoppers start to erode corporate pricing power.

Profit warnings in sectors ranging from luxury to food and airlines have fed into worries about a slowdown in the United States and other major economies.

These growth concerns were one of the factors behind a selloff that stripped around $4.8 trillion off global equities in just three days this month.

Stock pickers now need to identify those businesses that won't suffer from a normalisation of spending patterns, let alone from an economic recession.

"Consumers have been able to absorb price increases thanks also to the exceptionally high level of savings accumulated (during the pandemic). It seems that now this is coming to an end," Chiara Robba, head of LDI equity at Generali Asset Management in Paris, said.

"The second-quarter reporting season is showing some signs of consumer slowdown with consequent attempt from companies to reduce prices to boost consumption," she said.

S&P Global's business activity surveys in July suggested firms in the United States and the euro zone weren't able to pass on higher costs quite as easily as before.

There's now a long list of company earnings that point to a softening of pricing power or weakness in consumer spending.

Notable examples include Nestle and Ryanair in Europe and McDonald's in the U.S., along with payment firms such as Visa and Worldline. In many cases, share prices have tumbled.

Forty companies have cut guidance so far this season in Europe, BofA said on Tuesday, the most in over a year, with a majority citing weak demand, including, surprisingly, in the U.S.

"Signs of consumer weakness have caused concern," it said.

Sobering-Up Luxury Spending

The high-margin luxury industry hasn't escaped and while companies point to the long downturn in China, investors are also paying close attention to spending patterns elsewhere.

Kering's Saint Laurent cut prices of its Loulou bag in France, the UK, U.S. and China by 10-15% in May in a "very rare" move for the sector which Barclays said could reflect the brand acknowledging its earlier price hikes had been too aggressive.

Following three years of above-average increases, luxury price inflation is showing signs of returning to its long-term range of 5-7%, or below, said Luca Solca, an analyst at Bernstein in London.

"Weak brands that had been jumping on the bandwagon and increased prices materially are forced now to correct through discounts and promotions," he said. "This is happening because middle-class consumers in the West are sobering up from the post-pandemic euphoria."

Burberry, which sacked its CEO and warned on profit in July, has been cited as one example. Its shares erased almost one fifth of their value on earnings day.

Swatch and Hugo Boss have become the two most shorted stocks on the pan-Europe STOXX 600 index following disappointing numbers, data from Mediobanca shows.

Even sector leader LVMH, Europe's second-largest listed company behind Danish drugmaker Novo Nordisk, isn't immune.

"There is certainly a sense of consumer resistance to higher prices, given the ongoing cost of living crisis," Sanjiv Tumkur, head of equities at Rathbones Investment Management, said.

"This appears to be felt across all income segments – for example the luxury goods companies are seeing more challenging and volatile consumer conditions in many geographies, notably China, in all but the top end of the market."

Consumer Polarisation

Gillian Diesen, senior client portfolio manager at Pictet Asset Management, believes the latest earnings releases point more to consumer polarisation than a generalised loss of pricing power.

"At the highest end, most premium brands... are raising pricing again this year, although at more normalised levels," she said, adding that the trend extended beyond the luxury sector.

Carmaker Ferrari beat expectations thanks to sales of its pricier models, even though consumer demand in the auto sector has been variable.

Differentiation is a big factor too - sectors with low levels of differentiation, such as personal care and food and beverages, could be most at risk, said Generali's Robba.

In sporting goods, Diesen said higher-end innovative brands like On and Deckers' Hoka continue to benefit from pricing and sales growth, in contrast to mainstream names like Nike and Puma, which cut its profit outlook on Wednesday, sinking its shares to a six-year low.

In airlines, Rathbones' Tumkur cautioned against extrapolating Ryanair's warning to the rest of the industry, citing better demand at rivals Easyjet and Jet2.

"Ryanair is also more of a pure low-cost carrier, whereas its rivals have more exposure to package holidays, which seems to be currently prioritised more highly by customers," he said. "As ever stock selection will be key."

Source: Reuters

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Warren Takunda

Economic

Asian stock markets bounced between gains and losses on Thursday, while the yen and U.S. bonds attempted to rebound, as global investors struggled to find their footing in a wild week for markets.

Japan's Nikkei share average swung from early losses of as much as 2.5% and gains of 0.8% before trading 0.6% lower as of 0445 GMT. That left the index down 2.8% for the week, following Monday's 12.4% plunge, despite the ensuing two-day rebound.

Tech shares were notable underperformers on the Nikkei, following a 1.1% overnight slide for Wall Street's Nasdaq Composite overnight.

Taiwan's tech-heavy stock benchmark sagged 1.5% and South Korea's Kospi lost 0.9%.

However, gains for Hong Kong's Hang Seng, which reversed earlier losses to rise 0.7%, and for mainland blue chips helped to keep declines for MSCI's broadest index of Asia-Pacific shares to 0.3%.

Nasdaq futures were volatile, last trading flat after swinging between gains and losses.

Pan-European STOXX 50 futures sagged 1.1%.

"Today's Asia session could be important, as many had bought the dip with the hope that we see real follow-through buying and the upside momentum building," said Chris Weston, head of research at Pepperstone.

"It's clear that we have not been given all clear just yet."

The yen generally benefits when market sentiment sours, and was last up about 0.5% at 145.98 per dollar in a volatile session that saw it up as much as 0.86% at one point but also down 0.14%.

U.S. stocks ended lower on Wednesday as technology shares declined, with investor jitters stoked by weak demand in a 10-year Treasury auction.

The Swiss franc , another traditional haven, added 0.3% to 0/8592 per dollar.

The dollar-yen pair also tends to be sensitive to moves in long-term U.S. Treasury yields , which retraced about half of their overnight jump to 3.977% and last stood at 3.91% in Asian hours.

The dollar index , which measures the currency against the yen, franc, euro and three other major peers, was down 0.08% at 103.03, while the euro gained by the same margin to $1.0931.

Currencies, and the yen in particular, have been upended by a shift last week toward bets for steady interest rate increases by the Bank of Japan and aggressive cuts by the Federal Reserve, which helped send the dollar as low as 141.675 yen on Monday for the first time since the start of this year.

The move snowballed as some investors unwound yen carry trades, with a ripple effect on Japanese stocks. While much of that has run its course, traders are still struggling to find an equilibrium level.

"Positioning is much cleaner across the board," said Tony Sycamore, an analyst at IG.

"I know of very few funds, if any, that would allow their traders to hold positions given the magnitude of the moves we saw earlier in the week, particularly in the long 'Japan Trade,' i.e. long Nikkei and short JPY."

BOJ officials have sent conflicting signals since springing a surprise rate rise a week ago. Deputy Governor Shinichi Uchida on Wednesday played down the chance of another near-term hike, but a summary of the meeting released earlier Thursday revealed a hawkish slant among the board.

Meanwhile, weekly U.S. jobless claims data due later in the day could prove market moving following soft monthly payrolls figures on Friday that exacerbated fears of a U.S. economic downturn.

Traders are currently pricing in 111 basis points of cuts to the Fed funds rate over the remaining three meetings this year, which many analysts see as overdone.

"During recent volatility episodes going back to the banking crisis in March 2023, the promise or pricing of aggressive Fed rate cuts has proven to be as effective as actual rate cuts, via the loosening in financial conditions," said IG's Sycamore.

"That's enabled the Fed to save its rate cut bullets."

Elsewhere, leading cryptocurrency bitcoin gained more than 3% to $56,877.

Crude oil continued to rise following data the previous day that showed a bigger-than-expected draw in U.S. crude stockpiles.

Brent crude futures added 0.1% to $78.42 a barrel, following Wednesday's 2.4% jump. U.S. West Texas Intermediate crude gained 0.3% to $75.45, building on a 2.8% rally from overnight.

Source: Reuters

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FxPro

Cryptocurrency

Economic

Market picture

Crypto market capitalisation is back above $2 trillion, up 1.3% over 24 hours. On Wednesday, the Crypto Fear and Greed Index retreated from extreme fear territory at 17 (the lowest in over two years) to 29.

The sharp declines in Bitcoin and Ethereum, sustained by the rumblings of falling stock indices since late July, accelerated the formation of a powerful bearish signal—the death cross—as the downward sloping 50-day MA accelerated its decline in recent days, promising to cross the 200-day MA in the next few days. Often, this signal triggers a new wave of declines, but now both coins look locally oversold as the financial markets lick their wounds after the recent sell-off. Bitcoin: From Shock to the Death Cross_1

Bitcoin: From Shock to the Death Cross_1

However, even in case of a technical rebound, a return above the 200-day MA would be needed to prove that the bull market has returned. For Bitcoin, that level now stands at $61.5K, and for Ethereum, it is at $3200. Bitcoin: From Shock to the Death Cross_2

Bitcoin: From Shock to the Death Cross_2

Meanwhile, bitcoin’s share of all cryptocurrencies continues to rise, standing at 55.8%, up from 53.7% a month ago and 48.7% a year ago. This is normal, as altcoins are obviously in weaker hands at this stage of the market. Bitcoin: From Shock to the Death Cross_3

Bitcoin: From Shock to the Death Cross_3

News background

Abra warned of the risks of increased volatility in the cryptocurrency market, noting that the VIX fear index has risen to its highest level since the 2020 market collapse. Implied volatility (IV) will remain high until the macroeconomic situation calms down.

An analyst at Rekt Capital said that based on Bitcoin’s historical fluctuations, the bearish trend could continue for another two months. In his opinion, BTC’s bullish trend will resume as early as October, but don’t expect a renewal of the historic high anytime soon.

Factor founder Peter Brandt drew parallels between BTC’s recent collapse and the 2016 crash, which was followed by a bullish rally. If BTC follows the trajectory of past post-halving bull cycles, it will reach $130K-$150K by the end of August 2025.

UK hedge fund Capula Investment Management reported owning $464 million worth of bitcoin ETF shares. Capula is the fourth largest hedge fund in Europe, with $30 billion in assets under management.

Japanese Metaplanet will spend $59 million to buy Bitcoin. The decision was made amid volatility in the local stock market and a significant strengthening of the local currency.

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