GOLD: The bull may be ending amid investor exodus

GOLD: The bull may be ending amid investor exodus                      

• GOLD: A rotational shift into Bitcoin and other crypto assets by some retail and institutional investors is probably exacerbating Gold price weakness and the recent pace of outflows. Yet, peak cycle risks may have also risen for the bullion market due to – (1) risk of Fed tapering asset purchases by end-2021 (Citi analysts base case) and more aggressive US rates pricing for policy rate lift-off in 2022/2023 which may in turn be USD supportive; (2) 10Y US TIPS (inflation protected) yields having backed-up some 30-35bp this year and are likely a headwind for a long duration zero coupon asset like Gold; (3) A risk asset and commodities reflation narrative amid a COVID-19 vaccine trade that favors inflows into oil, copper, and other markets vs Gold; (4) Reduced geopolitical bid for Gold following the US elections and President Biden’s victory in early November.

• GOLD: Supply/demand balances for Gold should also be in hefty surplus this year, bolstering the inventory overhang and capping Gold market cheer. Lackluster financial Gold buying further emphasizes importance of retail jewelry, bar/coin, and central bank consumption this year. Demand for all 3 should grow in 2021 vs 2020, but is likely to remain below 2018/2019 levels while mine production rebounds from COVID-19 shut-ins in 1H’20 and Gold recycling activity ticks-up, boosting supply.    

NZD: Another boost from Finance Minister Robertson 

• NZD: The kiwi gets another boost from the NZ government yesterday as Finance Minister Robertson asks the RBNZ to include housing as part of its remit alongside inflation and employment. The RBNZ remit will be updated on March 1 and its operational objectives will remain the same – (1) to keep annual inflation between 1 - 3 percent over the medium term, and (2) support maximum sustainable employment. In pursuing these objectives, the RBNZ shall now consider the impact of its monetary policy decisions to support more sustainable house prices which will include dampening investor demand for existing housing stock to improve affordability for first-home buyers.

• NZD: Even though the change in remit may not directly impact the RBNZ’s monetary policy stance, it is likely to make it more difficult for the RBNZ to ease further (to negative rates) given the RBNZ already sees the NZ economic outlook as now balanced. This is a more positive tone than from the November MPS where “risks to the baseline scenario were less skewed to the downside than they had appeared earlier in the year”. Citi analysts retain their forecast of no further cuts to the cash rate as it remains at its current level until Q1 2023. This is consistent with market pricing on NZ rates.       

Key data/ events overnight    

• USD: US durable goods - strong demand for manufactured goods persists - US durable goods orders rise 3.4%MoM in January, stronger than consensus for 1.1% and Citi at 2.1%. Excluding transportation, durable goods order are up 1.4% while core capital goods orders gain 0.5%MoM and shipments 2.1%. Citi analysts note that strong durable goods orders over the last year have consistently led a pick-up in other industrial sector data such as production or employment. Strength in durable goods orders again in January signals persistent strength in goods-producing sectors into 2021.

• EUR: Euro area consumer confidence – an upside surprise in February to a 11 month high - the euro area composite ESI gains 1.9pts to a 11-month high of 93.4 [-0.8SD] (Mkt. 92.1, Citi 92.5). The rebound stems from continued outperformance in the manufacturing sector, but gains in other segments are also recorded, suggesting there is a tendency towards further gains unless euro area governments tighten restrictions (which remains possible in March to due rising cases in a number of euro area member states). Yet, with a more supportive international environment and signs that the vaccination campaign is gradually building momentum, Citi analysts look for further gains in coming months. This meaningful upside surprise also highlights the possibility of some upside risks to Citi’s baseline assumption of a second successive decline in euro area real GDP in 1Q-21, worth 1.1% QQ.        

Data due tonight/ weekend 

• USD: US personal income/ spending and core PCE data: Personal Income – Citi: 9.6%, median: 10.0%, prior: 0.6%; Personal Spending – Citi: 2.2%, median: 1.3%, prior: -0.2%; Core PCE YoY – Citi: 1.6%, median: 1.4%, prior: 1.5% - Personal incomes should rise a strong 9.6%MoM in January, largely reflecting the payout of $600 direct payments to individuals (stimulus checks) legislated in late December. With another round of direct $1.4k payments likely around March/April, it is very likely that income will even exceed April 2020 levels. Spending should also rise a solid 2.2%MoM, reflecting strong goods spending seen in January retail sales data but a softer increase in services spending. And despite softer-than-expected flat core CPI in January, Citi analysts expect a much stronger increase of 0.3% in core PCE for the second month in a row. US core PCE remains well on track to overshoot 2% around Q2 this year, before settling back closer to, and even a bit above, 2% by the end of the year. 

• CNH: China Manufacturing PMI February: Citi 51.1, Prior 51.3 – the official manufacturing PMI usually moderates on the Chinese New Year, given the cease of production. However, the holiday effect on production could be smaller this year, owing to the stay put policy. Meanwhile,  Chinese government has largely contained the domestic outbreak of Covid-19 post-CNY, which benefits the recovery of service sector and sentiment of China economy. Citi analysts expect manufacturing PMI to decelerate mildly in February.   

This is an extract from the Daily Currency Update, dated February 26, 2021. Please approach a Citigold Relationship Manager if you would like more information.