Gold continues to support global equity markets through the ‘hottest’ August! Is risk aversion ‘declining’?!

In European trading Monday, gold briefly dipped and then bounced back above the $1965 mark. The shift in inflation targets announced by Federal Reserve Chairman Colin Powell last week continued to support gold. At the same time, rising risk sentiment has suppressed further gains in gold. Global stocks were little moved on the day, but for the month as a whole, they posted their biggest August gain since 1986.

The Fed still dominates the market

Federal Reserve Chairman Colin Powell announced a major policy shift in his widely watched speech at the Jackson Hole annual meeting of central Banks last week, adopting an ‘average inflation target’ that would allow inflation to edge above the 2% target for a while. The Fed said it was prioritising employment targets over inflation, suggesting the current ultra-loose monetary policy could be extended for longer.

That is a big plus for gold, which has the property of hedging against inflation. At the same time, ultra-loose monetary policy has pushed down the dollar and U.S. bond yields, thus boosting demand for gold in dollar terms and without fixed income. “This points to a bearish view on the dollar over the next few quarters,” said ING strategist Chris Turner, noting that so-called real yields “will remain subdued and likely to continue to fall after the Fed creates higher domestic price pressures.”

Gold, which has rallied since Powell’s announcement last week, fell as low as $1954.16 an ounce in the $1976-77 supply zone before rebounding above $1965.

Investors will also continue to watch the Fed this week. A number of Fed officials will speak this week to give the market information on the outlook for the September meeting and views on the fed’s new policy implementation. Specifically, they include:

Global stock markets rally for safety?

On the other hand, the safe-haven demand for gold in the day’s performance was depressed. The volatility surrounding The resignation of Japanese Prime Minister Shinzo Abe last week has subsided. Today’s upbeat PMI data from China also boosted risk sentiment as investors became more confident that the global economy would recover from coVID-19.

In Asia, Japan’s Nikkei index was up 1.12%, and the Japanese market’s gains were supported by other fresh news. Local media have reported that Yoshihide Suga, an ally of Mr. Abe who has consistently supported Mr. Abe’s monetary and fiscal stimulus measures, is expected to be the next prime minister.

The stock market was also boosted by the announcement by Warren Buffett’s Berkshire Hathaway of a $6bn investment in Japanese trading companies.

But the Hang Seng index and the Csi 300 index fell slightly. European shares rose in early trading, with the Pan-European 600 index up 0.32% as of press time (18:35 GMT).

Taking a longer view, the MSCI World index jumped 6.7 percent in August, its biggest monthly gain since 1986.

Us stocks were particularly spurred by the dollar’s fall and monetary and fiscal policy, with the S&P 500 up 7.2 per cent for the month, wiping out all its gains since coVID-19 and topping its all-time high.

In Europe, German, French, Italian and Spanish stocks rose 4-7% in August.

In Asia, Japan’s Nikkei index gained 8.2 percent, South Korea’s Kospi rose 3.4 percent and the Csi 300 rose 2.6 percent.

The global economy has stabilised and financial markets have returned from the brink of collapse in February and March, thanks to aggressive stimulus policies from governments and central Banks around the world. In addition, the company’s quarterly results were not as bad as expected, adding to the optimism.

Gold, by contrast, was flat in August, falling from around $1980 at the start of the month.

But risk aversion is not over. Some analysts fear the current situation will not extend into the autumn. Nikolaos Panigirtzoglou, strategist at JPMorgan in London, said “a more positive market view on future growth and inflation will face two tests in the next two months”.

He believes the first test will be at the Fed meeting in September, with market participants waiting to see whether the central bank will take “more action or stimulus measures”. Then comes the US election, where the focus will be on whether Mr Trump or Mr Biden wins.

“It is likely to be a very close outcome, leading to months of political gridlock following the election and a lack of policy action by the ADMINISTRATION,” he said.

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