Gold Jumped to Four Months high as Bitcoin Tumbled and Fed May Not Taper in 2021

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Gold (XAU/USD-spot) made a high around 1912.62 early U.S. Session Wednesday, at four months high on renewed age-old appeal of traditional inflation hedged safe-haven hard asset and on lower USD as Fed may not go for any QE tapering in 2021, contrary to earlier market expectations. Gold jumped almost +7.13%, while BTC USD plunged almost -35% in May. BTCUSD tumbled over -50% from its April lifetime high of around $64374.00 to almost $30000 in May. Gold was mainly boosted by renewed safe-haven/inflation hedge appeal as Bitcoin ( USDBTC ), the ‘digital Gold’ tumbled amid Tesla CEO Musk’s crypto flip-flops and Chinese crackdown on crypto mining/trading.

As a reminder, back in April, BTCUSD made a fresh lifetime high around 64374.00 after Tesla CEO Musk disclosed that Tesla is accepting Bitcoin (BTC) as payment for its cars and Tesla made a purchase of BTCUSD at an average price of around 36000.00 in the last few months. BTC as well as other cryptos jumped on greater acceptance by corporates and institutions. The market was confident that like Tesla, other tech-savvy corporates like Google (NASDAQ: GOOGL ), Apple (NASDAQ: AAPL ) may also publicly embrace BTC as a digital currency.

But BTCUSD soon slips after the quarterly report card shows huge profit booking by Tesla for its BTC holding. BTCUSD was also under stress on various adverse regulatory remarks, institutional/corporate unwillingness, and lack of confidence.
And BTCUSD plunged to a 4-months low around 30000.00 after three Chinese banking and payment industry bodies issued a statement (through PBOC), warning financial institutions not to conduct virtual/cryptocurrency-related business, including trading or exchanging fiat currency for cryptocurrency/Bitcoin.

Over the last few years, BTCUSD was seen as a volatile digital alternative of XAUUSD (Gold), especially after CME introduced the future contract of BTCUSD, providing the way for more speculation, hedging, and trading. There was also increasing regulatory and institutional acceptance. But over the last few months increasing crypto scams, easy manipulation by celebrities, and regulatory concern---institutions/corporates are now hesitant to use it as an alternative digital/real currency. A mere crypto tweet here and thereby a celebrity like Musk often move BTC/Crypto abnormally.

On Sunday, Bitcoin again slumped as crypto exchange Huobi suspends services for new users in mainland China. And Cryptocurrency exchanges operating in Hong Kong will have to be licensed by the HK market regulator and will only be allowed to provide services to professional investors. According to Hong Kong law, an individual must have a portfolio of HK$8M ($1.03M) to count as a professional investor.

Crypto is a great tech innovation for system transaction efficiency a decade ago and to that extent, Bitcoin (BTC tech) is now obsolete, expensive, and has devastating EV impacts. BTC is like AOL or BlackBerry of Crypto world and thus its days may be numbered due to outdated technology. Many countries including the U.S. may soon put some regulatory ban on BTCUSD, paving the way for systemic investor exit. Fed or any other central bank would not like BTC as an alternative digital currency out of their regulatory/issuance control. If not controlled, BTC/crypto can cause huge bubbles later. BTC/Crypto may exist as a commodity (digital tech innovation) rather than an alternative global currency, helping money laundering and other criminal activities.

Gold is also getting a boost as the fine print of FOMC minutes (April) shows no QE tapering in 2021 contrary to earlier market perception. The majority of FOMC policymakers are quite hawkish/optimistic about U.S. economic recovery/activities amid the progress of COVID vaccinations, herd immunity, and reopening of the country coupled with monetary/fiscal stimulus, higher pent-up demand, and household savings. Most of the FOMC participants are of the view that going forward, the curve of U.S. economic/employment recovery will depend upon the curve of COVID and vaccinations (herd immunity).

But most of the FOMC participants are also of the view that despite upbeat employment reports for March, the Fed’s mandate of maximum inclusive employment goal is still far away from the goal and has not made substantial further progress from Dec’20.

The majority of FOMC participants do also think that higher inflation is transitory due to various factors like lower base effects, supply chain disruption, higher commodity prices, and labor shortage. Only a handful number of Fed participants suggested that if the economy continued to make rapid progress toward Fed’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases (QE tapering).

The current U.S. labor shortage is a byproduct of unfavorable demography (early retirements after COVID), lack of proper skill (post-COVID new world) in some sectors, COVID infections scarring, child care issues (physical schools not yet reopened), and generous stimulus/PUA checks. The U.S. is expected to fully vaccinate its entire population by Q4-2021 and PUA benefit may not be extended further beyond Sep’21. If the U.S. can vaccinate children up to 18-years by Sep-Dec’21, schools can be safely reopened by Oct’21 or Jan’22. Thus, we may see actual substantial progress towards the Fed’s definition of maximum inclusive employment (along with higher participation rates and proper wage growth) only from Jan’22.

In that scenario, Fed will go for QE tapering when it sees actual substantial progress of maximum employment (say unemployment rate drifted below 5.5%, 8.2M currently unemployed persons due to COVID become employed without any inequality) and core PCE inflation sustaining at +2.00% (after transitory effects fade in late 2022), on the way to stay moderately above +2.0% for some time. Considering all these pre-conditions and current & expected vaccinations/economic curves, we may see substantial further progress of Fed’s dual mandate goals by late 2022 and Fed may go for actual QE tapering from Dec’22 and gradual rate hikes from Dec’23.

The Fed has to ensure the U.S. debt interest/revue ratio does not go above the 15% red line in the coming days. Biden is expected to compromise to some extent (not significantly) on his $4T fiscal stimulus (infra/green), human/HR and social safety net) to rebuild America from corona carnage. Biden is also expected to compromise on his tax hike plans from 28% to 25% due to significant opposition from U.S. corporates (Democrat donors) as well as some of his own DNC colleagues. Thus, whatever may be the narrative, the Fed has no option but to keep U.S. government borrowing costs at lower levels, yet with attractive bond yields (for yield-hungry investors) till at least 2022-23; otherwise who is going to fund ‘Uncle Sam’ perpetually?

The Fed is already discussing QE tapering quite actively to prepare the market for the eventuality. If Fed goes for QE tapering from Dec’22 and gradual rate hikes from Dec’23, it may officially indicate the same from its June’22 dot-plots after seeing actual substantial further progress of its dual mandate (maximum employment and 2% price stability) as the U.S. is expected to fully vaccinate the country by Dec’21 (including children/adolescents).

Gold was also under pressure last week as U.S. PMI fine print indicates higher inflationary pressure, not seen in the last few decades; higher inflation is positive for bond yields and negative for Gold (as theoretically Gold has no yield; although Gold is a traditional safe-haven hard asset). But on Monday, the market was somehow relieved on the runaway inflation front after China intensified its crackdown on surging commodity prices to ensure the stability of the overall system and put up various regulatory measures.

On Monday APC session, Iron-ore futures tumbled after China's state planners/regulators (NDRC) continued to crackdown against soaring commodity prices by threatening top metal firms with ‘severe punishment for price manipulation to excessive speculation to spreading fake news. On Sunday, China’s NDRC (National Development and Reform Commission) warned top executives of top metals producers that there's a ‘zero tolerance’ for monopoly behavior and hoarding. Chain's attempt to reign in commodity prices comes as the government called price increases for copper , coal, steel, and iron-ore ‘unreasonable’ last week and vowed to curb speculation. China is also tightening credit conditions; deleveraging to slow credits to such ‘speculative’ metals firms in an attempt to rein on surging prices (inflation).

Further Monday on the inflation front, several Fed policymakers including Bullard, Brainard, and Bostic reiterated that the pandemic monetary vaccinations (QE) will remain in place for the foreseeable future, resulting in lower U.S. bond yields. They emphasized that they wouldn’t be surprised to see bottlenecks and supply shortages push prices (inflation) up in the coming months as the pandemic fades, but that much of those gains should be temporary. While market-based measures of inflation expectations have dipped, investors remain cautious about the risk of a pullback in the stimulus. Fed is also monitoring COVID tsunami/spikes in Asia.

In any way, Biden may face stimulus and inflation dilemmas ahead of the 2022 mid-term election. The Kansas City Fed President George noted that the Fed needed to be on guard in case the dynamics that have kept inflation low in recent years change as the economy reopens.

Bottom line:

Overall, Gold is being boosted by Fed ‘put’ as the U.S. Central Bank may not go for any QE tapering in 2021. Gold is also regaining its old shines as a traditional inflation hedge and safe-haven hard asset as Bitcoin/Crypto is under regulatory pressure maybe even banned. But at the same time, Gold is also being dragged by the rapid progress of herd immunity (COVID vaccinations) on both sides of the Atlantic (U.S.-Europe), reflation optimism, higher bond yields, and higher US dollar.

Technical View: Gold –XAUUSD
Technically, whatever may be the narrative, Gold now has to sustain above 1926 levels for any further rally to 1955-1985-2010-2065 zones; otherwise, it will correct again in the coming days.

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