Gold prices storm to new record highs

Gold goes through the roof

The world’s oldest safe haven asset stormed to a new all-time high on Monday, reaching a peak of $2,265 per ounce in an environment of thin liquidity as most of Europe is away on holiday.

Gold has risen more than 9% already this year, supported by direct purchases from central banks diversifying their reserves, hopes that cooling inflation will pave the way for lower interest rates, and persistent retail demand from Chinese investors searching for a hedge.

One impressive element behind the rally in gold is that it is happening despite a broadly stronger US dollar and rising yields this year, both of which are usually negative developments for the precious metal that is denominated in dollars and does not pay any yield. This suggests there is ‘real demand’ behind this rally, not just financial market volatility.

Looking ahead, the outlook for bullion remains bright. The trend of central bank purchases reflects an unstable geopolitical atmosphere and China’s attempt to reduce its reliance on the US dollar, so it could be a multi-year process that keeps gold demand elevated. Indeed, Chinese gold purchases could even accelerate if Donald Trump is re-elected president and the standoff between the two superpowers heats up.

Similarly, gold can still draw support from falling interest rates. Yields are still quite high from a historical perspective, so gold can benefit as yields fall back to more ‘normal’ levels, particularly if the US economy loses steam.

Yen stabilizes near three-decade low

Over in the FX arena, trading activity is subdued as most European markets are shut for a public holiday. Reflecting the calmer mood, the major currency pairs are stuck near their opening levels, waiting for fresh catalysts.

Dollar/yen has stabilized in a narrow range between 151.00 and 152.00. Repeated threats of FX intervention last week seem to have done the trick in preventing further yen losses, although judging by how shallow the recovery has been, traders are not rushing to buy the currency either. A break out of the 151.00 - 152.00 range is needed to reveal the next directional wave.  

As for the dollar, the latest round of PCE inflation stats and a speech by the Fed chief on Friday did not deliver any fireworks. The dataset was “pretty much in line” with expectations as the Fed Chairman noted, while his comments did not contain any new revelations on interest rates.

A huge week lies ahead for the dollar, featuring several key data releases. The ball will get rolling today with the ISM manufacturing survey, ahead of the non-manufacturing index on Wednesday. Of course, the main event will be the latest edition of nonfarm payrolls on Friday, which will help shape expectations around whether the Fed will slash rates in June.

Stocks set for new records

Shares on Wall Street will resume trading today after a long weekend, and futures suggest the S&P 500 is set to open at a new record high.

Some encouraging releases from China have helped lift the mood, with a manufacturing survey over the weekend showing that the sector finally returned to expansion. The improvement in sentiment also supported the China-sensitive Australian dollar today.