Negative Fed Rate? Gold Price Doesn’t Need It Because of These Two Things
The gold price today stands at US$1,731 and AU$2,682 after getting a boost over the last two days of trading.
We recently discussed the role of trust in the financial system and how in 2015, the old negative correlation between gold and equities started to fray.
Today we point out two simple things in light of the recent comments on rates emanating from Fed Chair Jerome Powell.
This is the gold price (in AUD terms) as of the last three months:
This is what Jerome Powell said about negative rates…
Here’s the quote:
‘The committee’s view on negative rates has not changed. This is not something we’re looking at.’
So, it seems like an open and shut case…
But there’s more:
‘There is a sense that the recovery may come more slowly than we would like, but it will come. And that may mean that it’s necessary for us to do more.’
Cryptic as always.
The second quote could be code for more QE — something which I think is definitely on the cards.
Why negative rates aren’t needed to drive gold price up, factor #1:
Coronavirus is clearly having an impact on miners.
A recent report from S&P Global Market Intelligence highlights how exploration is being disrupted by the pandemic.
‘The 25 major deposits discovered in the last decade represent 154.3 million ounces or only 7% of all gold discovered since 1990. According to the S&P Global data, there were 278 major new gold deposits found between 1990-2019, totaling 2.19 billion ounces of gold reserves.’
They go on to quote S&P Global principal research analyst Kevin Murphy, who says:
‘We do not expect the trend to reverse in the near term…We expect quite the opposite in 2020 as COVID-19 impacts exploration plans by companies of all sizes…The largest impact will be reductions due to lockdowns or companies exercising caution with their personnel. We expect gold budgets to decline about 20% in 2020.’
‘Producers will not be spared, as they face lower metals prices and country-wide closures in areas in which they operate, sending their budgets an estimated 23% lower. As a result, we now expect global exploration budgets to fall 29% in 2020 to a total of US$6.9 billion.’
So, less money for exploration could herald a supply squeeze, even if the market picks back up.
Why negative rates aren’t needed to drive gold price up, factor #2:
The US–China trade war could go into overdrive.
Trump is in the process of ratcheting up his rhetoric (again).
This is the latest relevant tweet:
Negative Fed rate? As perverse as that would be, the long-term gold bull case remains strong.
For The Daily Reckoning Australia