GOLD PRICE FORECAST: NEUTRAL
- Gold prices[1] rebound as Fed leans in to banish credit crisis stress
- Fears about economic downturn might revive liquidation pressure
- US retail sales, Chinese GDP data topping the economic calendar
Gold prices were trading at 2020 lows a mere month ago as the coronavirus outbreak battered credit markets. Lenders worried about the viability of would-be borrowers as global growth ground to a halt pulled back capital. That pushed up borrowing costs and drove desperate market participants to liquidate, with gold finding itself on the chopping block alongside stocks as well as cyclical currencies and commodities.
The metal has since fully retraced these losses as the markets voted their confidence in the Fed’s herculean efforts to prevent a 2008-style credit crunch. The central bank made its QE program open-ended, established the FIMA repo facility allowing large Treasury holders to temporarily swap the bonds for cash, and announced $2.3 trillion in new lending to small- and medium-sized businesses as well as municipalities.
Investors’ spirits seemed genuinely uplifted. The so-called TED spread – a measure of credit market stress that looks at the difference between lending rates on 3-month offshore Eurodollar deposits and analogous Treasury bills – has dropped from a nearly four-year high north of 70bps to a much more manageable 36bps. That broadly matches the trend average prevailing since the 2008 crisis (~33bps).
GOLD PRICES MAY FALL AS LIQUIDATION RETURNS AMID GLOBAL SLOWDOWN
The key question now is whether optimism is sustained. While policy stimulus seems to have been effective thus far at prying open credit markets, its capacity to drive a lasting pickup in economic activity seems limited. Cheap credit and subsidized purchasing power are probably not very useful beyond the admittedly helpful optics of bold action since they can’t be truly
