In the high inflation environment that we are currently facing, some people are looking at the price of gold, which when denominated in USD could not quite protect against inflation. Nevertheless, gold could get support from another direction.
Gold rose above $1,830 on Monday after news that some G7 member countries are planning to officially ban bullion imports from Russia in the wake of its invasion of Ukraine. Britain, along with the U.S., Japan and Canada, were considering taking such a step. Given London's central role in the gold trade, this action could potentially have global reach and negatively impact Moscow's ability to raise funds. However, some analysts have argued that gold shipments between Moscow and London have already fallen to near zero since Western countries imposed sanctions on Moscow, adding that the measure in the form of a possible decision merely formalizes what the gold industry has already been doing. Meanwhile, gold appears to have been under pressure since March on expectations that major central banks will continue to aggressively raise interest rates to counter galloping inflation.
Meanwhile, in the stock market, U.S. index futures are continuing last week's gains, and Wall Street is trying to recover from this week's sharp plunge. The Dow gained 5.4 percent last week, the S&P 500 rose 6.5 percent, and the Nasdaq Composite rose 7.5 percent. Nine of the eleven sectors in the S&P index posted gains last week, with strong weekly gains by large-cap companies such as Tesla (12.1 percent), Apple (8.9 percent), Microsoft (9.4 percent), Amazon (13.3 percent), and Nvidia (9.5 percent). Meanwhile, shares of energy and materials companies fell last week due to recession fears. Investors can still speculate whether stocks have found a bottom or are in the midst of a bear market. Markets are expected to remain volatile amid rising inflation, subdued sentiment, tightening financial conditions and a highly uncertain corporate outlook.
The People's Bank of China injected a total of CNY100 billion into the banking system on Monday, its biggest daily cash injection since March 31, through seven-day reverse repo operations. This is aimed at easing pressure from rising demand for cash at the end of the first half of the year. With CNY10 billion worth of repurchase agreements maturing on Monday, the Bank pumped in a net CNY90 billion. The central bank began pumping more cash into the financial system last Friday. Demand usually picks up at the end of the quarter, when commercial banks also need to replenish their cash positions ahead of the central bank's quarterly administrative audit. Nonetheless, this helped to maintain positive sentiment in Asian stock markets this morning.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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