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Gold spot is once again under limelight in the global market with price inking another multiyear high of USD 1,725.43 (as on 14 April 2020, 1:08 PM AEST), which also marked the highest level in the past seven years.
While the Federal Reserve is injecting a lot of cash to boost the economy, gold continues to draw favour among the investors in the ongoing turmoil, as COVID-19 is spreading at exponential pace across major countries worldwide.
The cash injection by the Federal Reserve coupled with a clouded economic condition seems to be harming the dollar prices more than supporting the financial market across the United States with the dollar index, which tracks the performance of US dollars against global currencies falling from 102.99 points (intraday high on 20 March 2020) to 99.81 points (intraday low on 27 March 2020), marking a fall of ~ 3.08 per cent.
Recently, the index tried to recover while touching 100.93 on 6 April; however, the recent unemployment numbers and FED’s aim of higher liquidity somewhat balanced the odds, and the index continues the downfall, to presently trade at 99.17 points (as on 14 April 2020, 1:21 PM AEST).
On 9 April 2020, the United States Department of Labor reported another jolting figure of 6,606,000 of Unemployment Claims for the first week of April, which ostensibly followed the previously reported figure of 6,867,000 for the week ended 27 March 2020.
While the job market across the United States seems to be paralysing, the United States Federal Reserve has unlocked another window for liquidity via cash in loans, and while the impact of recent USD 2.3 trillion loan window is yet a mystery, the market pushing the gold prices higher and halted recovery in major indices such as Dow Jones Industrial Average is drawing a clear contour of the whole picture.
Also Read: Is FED Running Out of Bullets in Bringing Down The COVID-19 Impact? Oil Market Yet Under Duress
Fed to Provide Another USD 2.3 Trillion In Loans
On 9 April 2020, the Federal Reserve announced an additional $2.3 trillion in loans support for the economy, which is aimed at assisting households, employers of all sizes, and local governments to deliver critical services.
The Federal Reserve unveiled a Small Business Administration's Paycheck Protection Program (or PPP) and suggested that it would further bolster the effectiveness of the program by supplying liquidity to participating financial institutions through term financing, which would be backed by the PPP loans. Also, the FED would extend the credit to eligible financial institutions through PPPLF (LF- Liquidity Facility).
Apart from that recent PPP and term financing facility, the Federal Reserve decided to purchase up to USD 600 billion in loans through the Main Street Lending Program and further mentioned that the Department of the Treasury would provide USD 75 billion in equity to the facility via using funds from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
FED also suggested that it would expand both the size and the scope of the Primary and Secondary Market Corporate Credit Facilities to increase the flow of credit to households and businesses, which would now contribute up to USD 850 billion in credit backed by USD 85 billion in credit protection provided by the Treasury.
The central bank has also established a Municipal Liquidity Facility to offer USD 500 billion to help the state and local governments, which would also provide USD 35 billion of credit protection to the FED through the Treasury by using the funds from CARES Act.
Data Backing Rally Behind Gold
The domestic gold spot bull rally has now reached around the target level of the bullish flag formed on the weekly chart reported by Us!
To Know More, Do Read: Get Ready to Pay ~2.8k for 24k Gold; Gold Bulls Break the Gated Cage
Gold prices are now somewhat closely mimicking the movement of the 2008 financial crisis with prices falling slightly due to the margin calls and rising up again as new investment flows.
The data backing gold rally is further suggesting a strong rationale behind gold with weekly open interest and net longs rising across global gold exchanges.
As per the recent data from the World Gold Council, the net weekly net longs till 7 April 2020 stood at 857.4 tonnes, up by ~ 2.69 per cent against the previous week, while net longs from money managers surged by ~ 6.10 per cent for the same period to stand at 587.62 tonnes.
While the weekly net longs are on the surge, the open interest across the future contract is also surging, reflecting optimism on the gold rally.
As on 10 April 2020, the open interest across multiple gold exchanges (as sampled by the World Gold Council) surged by 7.5 per cent against the previous week to stand at USD 103.2 billion.
Is the Joy Ride Coming For ASX-listed Gold Stocks?
Gold spot rose substantially across the globe as well as on the domestic front, leading to a further splash in ASX Ordinaries Gold Index, which rose from its recent low of 5,105.50 points (intraday low on 13 March 2020) to the present high of 7,216.50 (as on 14 April 3:19 PM AEST), which underpinned a price appreciation of ~ 41.34 per cent.
The rise in the gold spot price seems to have built confidence around the ASX-listed gold stocks in the domestic market, with many gold stocks observing brighter sunlight and closing in positive territory with large gains.
For example, Gold Resources Limited (ASX:GOR) closed 14.57 per cent higher against its previous trading session on ASX, while stocks such as Resolute Mining Limited (ASX:RSG), Newcrest Mining Limited (ASX:NCM), Northern Star Resources Limited (ASX:NST), Evolution Mining Limited (ASX:EVN), closing 14.94 per cent, 12.41 per cent, 14.1 per cent, and 9.25 per cent higher against their previous close on ASX, respectively.
Investors should now closely monitor the relative performance of the ASX-listed gold miners against the overall market to further gauge the overall mood of the whole investing community around the gold stocks, which are the secondary beneficiaries of the rise in gold prices.
Also Read: Australian Gold Miners- GOR and RSG Outperform Industrial and Sectoral Indices
