Article by Commodity Trade Mantra
Gold and silver experienced significant volatility this week after suffering a drastic decline Monday morning on news of a potential Covid-19 vaccine. The development saw a broad rise in risk assets while safe havens like gold and silver pulled back. Monday was massively risk-on, with the Dow soaring 4% to a new record high, ten-year treasuries yields shot up almost 17% in a single day as investors dumped bonds, and oil was ahead 8%. The U.S. dollar index gained about 60 basis points or 0.65%, while higher-beta currencies jumped.
It was news that Pfizer and BioNTech’s COVID-19 vaccine was over 90% effective in preventing the virus, and would likely be among the first to receive FDA authorization. The encouraging news everyone’s been waiting for appears to finally be here. We’re getting a glimpse of light from the end of this long tunnel.
Naturally, some gold and silver enthusiasts are wondering if a vaccine is enough to kill the Covid-19 virus, as well as the precious metals bull market. – A BIG NO.
Is this a sign of things to come, or a knee-jerk reaction that’s just short sighted?
The road to normalcy, whatever that will mean, is still a long one. In reality- the threat of coronavirus infections in real-time continue setting record highs in the United States.
President-elect Joseph Biden summed it up correctly in his first coronavirus status update on Monday. “It is important to understand that the battle against COVID-19 is still months away,” he said, referring to how long it would take to vaccinate the American public, even as Pfizer announced substantial progress in its vaccine trials. But the president-elect’s words made little difference as headline-reading algorithms had already made their call: Risk in, havens out.
Despite Biden warning about over-exuberance in COVID-19 treatments at this point, gold futures lost $100 an ounce at one point Monday, the most vicious culling in a day since August as everything else from stocks to oil rallied.
While a readily available vaccine on the horizon is an undoubtedly positive development for the world, there is a question of how quickly herd immunity can be reached. Rumored to be 90% effective, such a vaccine would still require a majority of the population to be vaccinated until the hurdle for herd immunity is met. Further still, distribution could prove to be a logistical nightmare and only delay the uptake more.
Consider that Pfizer expects to only produce 50 million doses this year, and up to 1.3 billion in 2021. Logistics will be a challenge, as the vaccine will need to be stored at -70 degrees Celsius, which is much colder than other vaccines.
Meanwhile – Restricted movements, quiet cities, empty restaurants, cinemas and gyms, and mostly local tourism. Daily life will continue to trudge forward.
Many of the bullish catalysts behind gold and silver remain untouched. We know the Fed has vowed to let inflation “run hot” above 2% to make up for years of anemic levels. Regardless of vaccination rates, the Fed has reiterated its willingness to remain accommodative & keep rates near zero through 2023 and both parties in Washington have expressed interest in another stimulus package.
Debts and deficits are going to continue to soar. Even with a Republican-led Senate, Biden’s still likely to get a $500 billion to $1 trillion “skinny stimulus” bill passed early next year. Though well under the $3 trillion bill passed in May, Goldman Sachs says this would still be nearly 5% of GDP.
The outlook for the US Dollar remains troubled as these plans will increase its supply – an important tailwind for gold and silver.
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