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Gold unable to retest 2020 high

Despite the recent softer tone for the US dollar, a deterioration in US/China geopolitics and a rise in the delta/lambda variants of coronavirus, gold has been unable to breakout convincingly above the 1800 an ounce on any safe haven buying binge. The only possible conclusion is that Auric is still traumatized by the Federal Reserve’s signal that it will taper its monetary policy on a time table earlier than what was priced in as the market consensus.

Not even record negative US bond yields have led to any sustained demand for gold at current levels. The gold market has clearly accepted Fed Chairman Powel’s view that inflation will be transitory, the reason the yield on the 10 year US Treasury bonds has plunged from 1.75% in late March to 1.246 as I write.

Despite the epic rise in the Federal Reserve’s balance sheet to $8.2 trillion last summer, Wall Street has not lost its trust in the high street of central banking and the credibility of the international monetary system remains intact, another bummer for gold.

In retrospect, gold had been unable to remotely retest its 2nd October 2020 high of 2065 that was triggered by the onset of the virus, its subsequent shock to world trade/economic growth and an acceleration in inflation metrics. Yet I believe the ingredients for a short term rally in the yellow metals remains the path of least resistance in global markets. Why?

One, the Federal Reserve’s dual mandate will force it to postpone its taper as long as the US labour market remains so gravely unsettled.

Two, Chinese President Xi Jinping has demonstrated a willingness to impose his policy diktat on Chinese technology companies even to the detriment of foreign capital flows into the Middle Kingdom. The Chinese crackdown on Hong Kong and Sinkiang is a classic example of Xi’s nio-Maoist geopolitical brinkmanship that only reinforces my desire to own some gold as an insurance hedge.

Three, the delta variant virus wrecked havoc in countries as disparate as India and Brazil and has gutted tourism/mobility in Asia. I was shocked to read that Thai tourist arrivals plunged more than 99% from 39 million in May 2019 to only 34,000 in May 2021. No wonder the Thai baht is Asia’s worst FX performer despite its trade surplus, down 10% against the US dollar in 2021. The Kingdom of Smiles is now the Kingdom of Sighs and there is no point in chasing rainbows in Phuket while the virus rages.

This means safe haven demand for gold should rise in the months ahead and I will thus sell 0.6 delta 6 month put options on Comex gold to implement my view that gold prices are headed higher in the next 6 months.

Matein Khalid is Chief Investment Officer with Asas Capital

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