It is a well-known rule of thumb that the safe haven asset class which includes gold typically trades with an inverse correlation to equities. There is an exception to that rule, and that is when the Federal Reserve eases their monetary policy with low rates and the accumulation of assets on their balance sheet to provide liquidity. This is because that action is considered bullish for both gold and U.S. equities. It seems that in this instance there is a unique divergence in the way gold and U.S. equities have reacted to statements made today by the Federal Reserve’s Chairman Jerome Powell.
In the run-up of 2008 to 2011 we had both U.S. equities and gold running to all-time record highs in unison as the Federal Reserve began their quantitative easing programs. Statements made by Chairman Jerome Powell up until today have been emphatic in his explanation of the slow and steady accumulation of $60 billion in assets each month not being a new round of quantitative easing.
That defensive posture and explanation by the chairman changed today when Chairman Powell said that the “central bank would use quantitative easing as a tool against the next economic downturn.” Although he did not go as far as saying that the recent asset accumulation was in any way a form of quantitative easing, today’s statement opens the door to increase asset accumulations aggressively if needed.
According to MarketWatch, “In testimony before the Senate Banking Committee, Powell said the Fed had two recession-fighting tools; buying government bonds, known as QE, and communicating clearly with markets about interest-rate policy, routinely considered as “forward guidance. We will use those tools — I believe we will use them aggressively should the need arise to do so.”
His testimony occurred on the same day that the U.S. Treasury announced that they recorded a $33 billion budget deficit in January. Analysts at Reuters forecasted that the deficit would only increase by 11.5 billion last year. More alarming than the underestimate by analysts was the fact a year ago the treasury announced a budget surplus of $9 billion.
U.S. equities all traded in record territory today is a direct result of data suggesting that there is a slowdown in the number of new cases of the coronavirus, now labeled as COVID-19 by the CDC. The Dow Jones Industrial Average gained 275 points today, and closed at a new all-time record high of 29,55.42. The NASDAQ composite also surged to a new all-time high of 9725.96, and the S&P 500 get a new record high at 3379.75.
At the same time, we saw gold trad fractionally lower on the day. As of 5 PM EST is currently trading down $1.30 and fixed at $1569 per ounce. With the exception of palladium all the other precious metals did close lower. However once again palladium was able to buck the trend as it gained over $63 in trading today and is currently fixed at $2329.
According to a report by Johnson Matthey one of the largest precious metals refiners in the world said that the palladium market “was in a supply/demand deficit of more than 1 million ounces in 2019, and the shortage is expected to be even worse in 2020.”
If the report by Johnson Matthey is accurate it could signal much higher prices and the possibility of palladium reaching as high as $2700 per ounce this year.
Wishing you as always, good trading,