No big sell-off coming, US market may end year 3-5% up: Geoff Dennis

People want to hold on to their gold positions as they see how the inflation story plays out, says the Emerging Markets Commentator.

There are two very different cues. On the positive side, jobless claims have fallen below a million in the US and on the negative side, IEA has cut global oil demand for 2020 to 91.9 million bpd. How are you looking at both the cues?
I am not sure they are really pointing in very different directions. The jobless claims numbers dropping below million for the first time since March is a good headline but it is still bigger than any number in any previous cycle. The previous record was around 680,000 in 1982. So, this is still a very bad number but obviously there is some sign that these numbers are continuing to come down.

The economy is still very weak and there is fear for the economy going forward because the Covid-19 cases in this country are pretty bad. You can tie that up with the IEA forecast by arguing that the IEA forecast, probably the first time after about three months, is a recognition on their part, like the IMF did several weeks ago that the global economy is probably weaker than they had anticipated a while ago.

Clearly there will be a dramatic drop in oil demand this year — something like 9% or 10%. Even the shorter term number declines is still a bad number with any sort of historical perspective.

Which way do we go from here? Do you see any pain in the near term or are there enough levers for a sustained up move?
We are going to go higher but it will be modestly higher over the rest of the year. The economic data will be very choppy but will probably gradually improve from these very very depressed levels. The market will struggle technically to get through the old high which is about 20 points away. This may be less than that now. There has been a remarkable rebound from where we were in late March. Now to break through that high level will be difficult simply because the economy is so weak. We are highly vulnerable to bad news on the economic front, the earnings front, the Covid-19 front etc. and therefore it is going to be very choppy. My guess is that we might get a pullback, but will end up higher by the end of the year by 3% to 5%. So, I do not think a big sell off is coming.

Russia has announced a Covid vaccine. Do you believe that is enough for many investors to start unwinding their positions in the precious metals?
I am sorry to say, take the Russian vaccine with a pinch of salt until we know that it is being properly tested. I am not an expert in this field but apparently it has not been properly tested anything like the standards though would be anticipated in the US or the UK for example. It is very much an attempt by Russia for a Sputnik moment, if they get it out before everybody else. But it is a long way to go before we know this vaccine really works.

There will be a pause in the excitement but the other thing that is going to stop is going to keep gold very well supported. You have started to see some inflation picking up in the US. We had another pretty big CPI number this week and although this is also due to distortions in the economy and relatively low demand levels.

People want to hold on to their gold positions as they see how the inflation story plays out. With all the assistance the Fed giving to the fiscal side is going into the economy, if inflation does pick up a little bit more, this is when the Fed level will increase. The question is when and if they will start to pull some of the support back to the economy. I am sceptical about the vaccine. You are saying inflation is picking up. I still think those are signals that are net bullish for gold and not bearish even at this level.

There has been a lot of haggling over the new Covid relief package for American businesses. What is the market expecting from this and is it already factored into the up move that we have seen on Wall Street? Could it give a further boost to market rally?
It is factored in. When you do get an announcement, you might get a modest boost but I think it is effectively priced in. There is this sense that after the Congress move earlier in the pandemic to produce support packages for the economy, this time it is back to business as usual which is haggling over the details and indeed the size and that is perhaps what you would expect as we get closer and close to the election.

Now your best bet, although they are apparently “miles apart” may be a trillion dollars apart, will be an agreement on further support packages for the economy. I have to believe that the market anticipated some agreement and so I do not look for a big boost for the economy from this fiscal package. On the contrary, if the talks broke down, we have to full back on whatever Trump has put in place. Then the market will be more vulnerable to a pullbac. So, it is ineffectively priced in.





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