Hong Kong: Gold prices approached the $2,000 mark as investors piled into the yellow metal as the US Federal Reserve is expected to signal a higher tolerance for inflation at its two-day meeting starting later in the day.
“The collapse in real yields has been the link between easy policy and gold. As central banks inject liquidity, real rates decline and the opportunity cost of holding gold recedes,” Mathieu Savary, an analyst at BCA Research, said.
He said that even if nominal yields were flat or slightly up, inflation is expected to continue to rise and real yields to fall, and that at a point central banks will not want to add to the stock of liquidity.
“At this point, real interest rates will stop their decline and gold prices will likely suffer, especially as the yellow metal trades above its fair value based on real interest rates and inflation break-even rates.”
Gold is expected to remain well bid until Treasury yields start taking off from their 0.6% readings, he said.
Gold struck a high of $1,981 per ounce and is currently trading around $1,931 per ounce.
The US dollar tumbled and against a basket of currencies it fell below the support line of 94 to trade at 93.77.
“Overall, potential developments are still stacked against the USD at this juncture. The risk is that everyone is on the same side of the boat now, and that generally risks some snapback ahead,” Terence Wu, a strategist with OCBC, said.
“But for now, calling a bottom in the broad USD is still akin to catching a falling knife, and we are hard-pressed to find significant support levels on the DXY index until 92.00 area.”
Investors await the approval of a $1 trillion stimulus package amid a renewed increase in Covid-19 cases around the world. The bill is expected to be intensely debated and its passage is seen as likely to be long and drawn out.
“US lawmakers are far apart on the second stimulus package even whilst the jobless benefits expire this Friday; a compromise before the start of the summer recess on 7 August is not assured,” said DBS strategists Philip Wee and Eugene Leow. They also thought that technical indicators have turned negative against the DXY and positive against its components and commodity currencies.
Asian markets wary
Overall, Asian stocks ended on a nervous note, off morning highs, with Japan’s Nikkei 225 dipping 0.26% and Australia’s S&P ASX 200 retreating 0.39%. But investors’ support for the tech sector boosted the Hang Seng Tech Index, which rose 3.51% and helped the broader Hang Seng index that traded up 0.69%. Mainland China’s CSI 300 benchmark leapt 0.88%.
Tech giants Facebook, Amazon, Apple and Google are due to report quarterly earnings this week.
Credit markets traded up with primary issuances from Jiangsu Zhongnan Construction, Country Garden, China Construction Bank and CSC Financial in the market. The Asia IG index tightened marginally at 74/75 bps with sovereign CDS moving in by 1-3 bps.
Also on Asia Times Financial
Foreign Exchange: Gold pauses … as it awaits more signals of doom?
# Japan’s Nikkei 225 dipped 0.26%
# Australia’s S&P ASX 200 retreated 0.39%
# Hong Kong’s Hang Seng index climbed 0.69%
# China’s CSI300 advanced 0.88%
# The MSCI Asia Pacific index edged down 0.37%.
Stock of the day
Tencent stock rose 4.52% and topped the volumes at the Hong Kong Stock Exchange becoming the world’s most valuable social media platform edging past Facebook. It is now the world’s seventh most valuable company.
This report appeared first on Asia Times Financial.