The precious metal, gold touched its lowest level for 2019 yesterday. The price touched the low of $1,266 by extending its losses for the year. The primary reason for this is the strong rally in the global equity markets. The S&P 500 and the Nasdaq index climbed to the record level on Tuesday. Both indices are up 16% and 22% YTD respectively while the yellow metal is down nearly 0.36 percent YTD. Remember the precious metal formed a high of $1346 in February this year and ever since the price has been in a downtrend with lower highs and lower lows.
Gold acts as a safe haven when there is uncertainty in the markets. Today, we do not have enough of that in the markets. The reason is the People Bank Of China is determined to remain accommodative at any cost. The fact is that it is not only the PBOC, but the Fed has adopted a dovish tone.
Nonetheless, China is a major factor here. The bank has assured investors it is not going to deviate from its current sailing path in relation to its monetary policy. Hence, the cost to insure the country’s 5-year government bond against default has touched the lowest level in nearly 11 years. This has made a major impact on the sentiment, a positive one.
The below chart shows credit default swaps (CDS) spread on China 5-year sovereign dollar bonds has taken a serious dive. This has pushed investors away from a safe-haven. As a result, the Shanghai index has seen some strong upward move. This trend has been very strong over some time, especially since the start of this year. The index is up 25 percent YTD. This explains why retail investors aren’t buying gold.
Having said this, the picture looks very different when we are talking about governments and their purchase of bullion. China continued its purchase of gold for the fourth straight month. The PBOC reserves sit at 60.62 million ounces in March.
One significant take away from this is that China paused its purchase of gold for nearly 6 years from April 2009 and we saw a similar from October 2016 until December 2018. Remember Beijing has always been shy in revealing its gold holding.
To conclude, I think it is an interesting and alarming factor that investors are not thinking of insuring their portfolio while Beijing is bolstering its gold reserves. The PBOC has pushed the credit default curve lower and yet it is buying protection for itself. Caution should be taken here.
