Metals Daily (24-May-2021): Sell-off in Bitcoin embellishing gold’s role as a safe-haven

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Source: Trading Economics

A concise summary of what’s moving markets, the impact on base, precious and ferrous markets, including Theme of the Day.

What’s moving markets?

  • Global equities end last week lower in volatile trading marked by the Fed signalling it would discuss winding down its crisis-era support. The Fed published minutes of its latest policy meeting (April) that showed some of its rate-setters thought the central bank should “at some point” start to discuss “a plan for adjusting the pace of asset purchases”. Calmness returned as investors also reacted to signals that the Fed remained in no hurry to reduce its $120bn of monthly bond purchases that have boosted markets since March 2000. Both 10-year yields and the USD index were lower on the week.
  • Business conditions were booming in the US, HIS Markit’s PMI produced its highest-ever reading of 68.1 for May.
  • Macro concerns surrounding overbought asset prices, inflationary fears, and concern that the Fed may be falling behind the curve pushed gold higher. Gold ETF holdings are also increasing, with six consecutive days of inflows following months of drawdowns, while the chart picture has brightened as prices trade above the 200-dma. The volatility and sell-off in Bitcoin had embellished its role as a safe-haven. The rest of the precious metals complex, being more industrially-biased than gold, fell in sympathy with the losses in base metals.
  • Increasingly strident comments from the Chinese authorities regarding the recent runups in various domestic markets appears to have triggered the selling in commodity markets which accelerated after the release of the FOMC minutes. Increasingly strident comments from the Chinese authorities regarding the recent runups in various domestic markets appears to have triggered the selling in commodity markets which accelerated after the release of the FOMC minutes. Base metals have been restrained by macro concerns. Inflation is chief amongst these worries; China has been particularly vocal about this, with senior figures calling for commodity price rises to be constrained. In copper and tin’s case, the fundamentals outside of China remain extremely tight, with little suggestion of prices coming off significantly.
  • So far corrections have been short-lived and shallow. Is this about to change? Arguably, supply-side issues are likely to restrict the downside and amid headwinds in the short-term, the base metals complex looks likely to consolidate within fairly elevated trading ranges. Furthermore, if the mantra of “the trend is your friend” is true, then the price trend is still pointing firmly up, and dips should uncover buying interest from both physical and investor communities. The charts overall remain bullish with prices holding above both the 100-dma and the 200-dma.   
  • Iron ore and steel lost ground as comments from Chinese Premier Li Keqiang are largely thought to target the steel and iron ore markets. Authorities in China called for tougher oversight of commodity markets following recent price spikes and the harm this was doing to the economy. Chinese policymakers threatened to increase regulation to control further prices gains.

Sell-off in Bitcoin embellishing gold’s role as a safe-haven

  • Bitcoin tumbled as much as 30% to a low of just above $30,000 as cryptocurrency markets were hit by Chinese regulators signalling a crackdown on the use of digital coins. China’s Vice Premier Liu He reiterated the government’s intention to crackdown on Bitcoin mining and trading, according to the Financial Times. His comments followed statements from three state-backed organizations, last week, that warned that digital currencies were not “real”, should not be used for purchases, and could face further regulatory changes from banks and other authorities. The energy consumption used to mine Bitcoins is very substantial. After a volatile week, a bitcoin was still worth about $37,000.
  • Tesla has suspended customers’ use of bitcoin to purchase its vehicles, Elon Musk said last Wednesday in a tweet reported by BBC News, citing concerns about the use of fossil fuel for bitcoin mining. Musk said Tesla would not sell any bitcoin and intends to use bitcoin for transactions as soon as mining transitions to more sustainable energy rather than using fossil fuels, particularly coal. “We are also looking at other cryptocurrencies that use <1% of bitcoin’s energy/transaction,” Musk said.
  • Large parts of the crypto community have hailed bitcoin as the new gold, especially young investors who see it as a more worthwhile investment compared to bullion, which has earned bitcoin the nickname “millennial gold“. The sell-off looks to have driven investment flows into gold, a safe-haven perceived as a hedge against inflation and a centuries-old store of value.
  • Analysis by the World Gold Council suggests that gold stands apart from cryptocurrencies in general and Bitcoin in particular. Gold is an effective, tried, and tested investment tool in portfolios. It has been a source of returns rivalling that of the stock market over various time horizons; it has performed well during periods of inflation; it has been a highly liquid, established market; and it has acted as an important portfolio diversifier, exemplifying negative correlation to the market during downturns. The recent performance of cryptocurrencies has been noteworthy, but their purpose as an investment seems quite different from gold. The crypto market is still in development, and liquidity is scarce. We believe that their price behaviour at this point, while still attractive to many investors, seems to be driven in large part by high return expectations – fuelled by momentum and aided by low interest rates.

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