Stocks,GoldandHopetrade

The world alternates between the extremes of hope and despair, the statement though abundantly cliched, is true most of the times. “Most” being the operative word here. As of now the hope trade seems to be gathering steam. The dollar index is down below 99 and DJIA was up again by close to 2.4% in yesterday’s trade. Dow Jones which saw the lows of 18500 on 23rd March is now at 24000, a neat 30% recovery. The ray of hope is predicated on the assumption that the new infection and fatality numbers from the hotspot places like NY, Italy and Spain have been coming down and the expectation is that the peak of the epidemic is already behind us in these places. US President constant call to open the US economy sooner rather than later has also added to the hope trade.

The only exception to the risk off trade has been in gold prices where the yellow metal has rallied to its seven year high levels. The most probable explanation for that is the fear of debasing of fiat currencies resulting from extreme expansionary policies by the Central Banks.US Fed’s balance sheet size has already touched 6.5 trillion US Dollars and is expected to go even higher in coming days. The total supply of gold remains the same as new stock can’t be created on demand.

James Rickards in his 2011 book The Currency Wars, explains this phenomenon in detail. He writes that the new world order started in BrettonWoods when most of the world countries agreed to be part of the US umbrella and agreed that they will trade in US dollars. With US keeping the dollar value tethered to gold. As per Rickards in some not so distant future the fiat money has to converge to existing gold stock, requiring a sharp revision in gold prices.

In other new, apart from the stimulus packages being announced by the govts, Central banks keep adding their monetary heft to the virus response. Yesterday South African Reserve Bank cut the benchmark repo rate by 100 bps in an out of policy move. The repo rate now stands at 4.25% its lowest level on record. In a similar though much muted move the Chinese Central Bank also reduced the rate of its medium term lending facility from 3.15% to 2.95%. Bank of Canada is expected to announce its policy decision today. As the bank is already near the lower bound of the policy rates more interest will be in the QE numbers which it announces.

Indian rupee opens around 76 after a mid week holiday on Tuesday. The 10 year benchmark bond opens at 6.46. The national lockdown has been extended to 3rd May as the number of virus cases increase.