Gold trades fractionally higher as fundamental’s suggest much higher pricing

As of 3:34 PM EST gold futures basis the most active August contract, is trading fractionally higher, currently bid at $1736.80 a net change of + $0.20 on the day. Spot or physical gold is currently up by approximately $3.00 and bid at $1728.35. These fractional gains comes in spite of mild headwinds composed of dollar strength. Currently the dollar index is trading + 0.20% higher on the day, and fixed at 97.13.

While gold prices have been kept at check with solid resistance between $1750 and $1765, the changing geopolitical and economic fabric of the global economy continues suggest that a breakout in gold pricing is highly probable. There are factors that will take gold above $1800 per ounce by the end of the year.

First and foremost is the current global pandemic which is still absolutely active, with a second wave of new individuals contracting the virus. The fact that approximately 30 million individuals in the United States are currently unemployed, and that number is dwarfed by the total individuals that have lost employment worldwide. The International Labour Organization is predicting that a 6.7% loss of jobs globally will occur in the second quarter of 2020, which is equivalent to 195 million full-time jobs.

This has resulted in an economic contraction globally that has not been witnessed since the Great Depression of the 1930s. The pandemic will run its course, and at some point, a vaccine will be created to effectively end this global crisis. That being said, once the pandemic has concluded the economic fallout will continue. The U.S. Treasury Department’s has already spent $3 trillion to fund the aid packages voted upon by Congress. The Federal Reserve’s mandate and current monetary policy of quantitative easing which has added an additional $3 trillion, and taken interest rates to near zero. This will swell the current massive budget deficit. The massive amount of debt coupled with a contracting GDP will take years, if not decades to normalize.

Secondly are the current geopolitical hotspots where conflicts have occurred. There is currently a skirmish between the Chinese and India. Disputed territory between thereto borders have led to military action by both countries. There is also renewed and elevated tension between North and South Korea. On Wednesday North Korea said it would redeploy troops to the demilitarized border after they blew up the inter-Korean liaison office building on Tuesday. This conflict is currently at a stalemate after South Korea’s president Moon Jae-in offered to return to a dialogue which was rejected by North Korea.

According to the Korean Central News Agency (KCNA) Kim Jong Un said, "The solution to the present crisis between the North and the South caused by the incompetence and irresponsibility of the South Korean authorities is impossible and it can be terminated only when the proper price is paid."

Lastly is the potential for the U.S. dollar to fall sharply. Stephen Roach, Yale University senior fellow and former Morgan Stanley Asia Chairman said, “the era of the U.S. buck may be coming to an end and is forecasting a 35% decline soon in the U.S. currency against its major rivals, citing increases in the nation’s deficit and dwindling savings.”

In an interview with CNBC’s “Trading Nation” Stephen Roach said, “the rise of China and the decoupling of the U.S. from its trade partners is setting the stage for a dramatic weakening of the U.S. currency in the next few years that is likely to end the supremacy of the monetary unit as the world’s reserve currency. The dollar is going to fall very, very sharply.”

The combined geopolitical unrest and global economic fallout from the pandemic, and the potential for the U.S. dollar to fall sharply collectively will have a profound and long-lasting impact. This impact could also be the underlying fundamentals which take gold prices well above $1800 per ounce by year end.

Wishing you as always good trading and good health,