While we continue to see the long-term trend pointing up in gold, the approaching week could bring about extensive volatility as the market wrestles with concerns about physical demand destruction versus the possibility of a surge in safe haven buying. We base the projection of volatility on continued spikes in US infection counts and the strong probability that many areas will be forced to roll back re-opening activities to stem the spread.
Certainly the gold bulls were disappointed by the US Congress’ failure to move swiftly on another stimulus package, but they also have to be disappointed that the market has generally embraced the idea that gold will fall victim to demand destruction due to reduced recovery prospects instead of benefiting from flight to quality buying. However, some economists are beginning to raise their expectations for inflation. Inflows into TIPS (Treasury Inflation Protected Securities) recently reached record levels. Another factor that could cushion gold against a significant correction is the Fed’s purchase of $1.68 billion worth of corporate bonds, as noted in its most recent weekly report.
Gold prices on Friday were $87 above their early June low and $30 above the middle of the April-June consolidation. Those traders interested in buying gold might have to accept significant risk by placing stops well below close on June 19. On the other hand, large and small specs have already reduced their net long position from their 2020 peak of 427,000 contracts on February 25 to 262,000 on June 9, which is their smallest net long in 12 months. Those not wanting to miss out on the next wave up in gold prices could be well served by implementing a strategic long position using options.
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Originally Published on June 26, 2020
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