*By Christophe Barraud, Chief Economist & Strategist at Market Securities
TrackInsight data show that investors kept piling into “Gold” ETFs with cumulative inflows hitting a new YTD high. In addition, Bloomberg also noted today that global holdings in bullion-backed ETFs “have expanded for 17 days in a row, the longest run of inflows since 2009”. As a result, “the total stash now stands less than 35 tons away from a record set in 2012.”
As a safe heaven, gold has climbed in 2019 in a context where global growth has slowed markedly and global economic policy uncertainty index reached a record high in August. Investors remain particularly cautious about the U.S.-China trade war due to a potential negative spillover on global activity. The problem is that, if the Dec. 15 tariffs are implemented, our model suggests that the probability that the U.S. starts falling into recession in 2020 would jump above 50%.
In the meantime, several issues have the potential to create persistent damages on both the economic and geopolitical fronts in the short term, including a potential Hard Brexit by the end of the month (Oct. 31) or U.S. auto tariffs from mid-November.
Therefore, central banks have adopted accommodative monetary policy. As an example, the ECB will start a new round of asset purchases (€20B/month) as early as November while the Fed is expected to ease its policy on Oct. 30 by cutting rates for the third time this year and formally announcing asset purchases for reserve management – likely to be implemented in November.
As a result, the arbitrage between holding gold (as a store of value) or government bonds/cash has also slowly turned in favour of gold amid the expansion of negative-yielding debt worldwide. The global stock of negative-yielding debt remained close to historical high while more banks are thinking about implementing negative rates on deposits. As a matter of fact, Reuters noted that “UniCredit Chief Executive Jean-Pierre Mustier (speaking at a conference in Brussels in his capacity as chair of the European Banking Federation) recommended general charges for cash deposits and ECB purchases of bank bonds.“
Disclaimer – http://www.market-securities.com/disclaimer-2