Daniel Lacalle, IG Trading the Markets, May 20, 2020

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Disconnect between markets and economic reality:

“There is a huge disconnect between markets and the economic reality, and it’s fundamentally based on the view that 2020 is a lost year and therefore what investors need to think about is 2021 is a recovery year. It looks a very dangerous bet to me because if there’s anything that we have learned from this crisis is that estimates for 2021 remain excessively optimistic, and that the V-shaped recovery is more than elusive.”

Reaction to liquidity injections:

“The reaction of markets has been very aggressive to the liquidity injections coming from the Federal Reserve and the European central banks. But I think that at the same time that level of risk-taking is too high considering the challenges both on the economic growth recovery, but more importantly, because it’s been driven by the most cyclical sectors, the recovery in earnings cash flow and balance sheets.”

Gold miners/ BANG stocks:

“I personally always say that if you want to look at the world of metals or commodities, and you want to invest in the fundamentals of those metals or those commodities, the best way to play it is through the commodity itself, or the macro, not through equities, because cost of capital is also rising and there are challenges of financing.”

Covid-19 vaccine/implications for gold:

“There are two things that we know about Covid viruses. One is that there has never been a vaccine for a Covid virus. That’s something that we need to pay a lot of attention to when we get these levels of optimism in the market about the vaccine. When 18 previous types of viruses have never seen a vaccine, you cannot expect it to happen or at least happen as quickly as markets would want.

The second is there is likely to be a treatment, there is likely to be a way to live with Covid-19. What is the outlook for gold in that environment? Well if anything gold is proven in 2019 that in an environment in which markets remain positive and remain attracted to a certain level of expectation of economic growth, gold and the dollar do and can rise in tandem.”

“Gold is currently working as an alternative and as a de-correlated asset to a downturn. But we must remember as well that it is a pretty good inflation hedge. So, in general I think that the outlook for gold even in and in a recovery is actually pretty good.”

Gold/silver ratio

“I always tell my clients that if you like gold you certainly have to like silver.  I don’t understand why you would be long silver short gold or have it as a pair. I think that you need to have both. But I don’t believe in the debate about the ratio of gold to silver. Reminds me of the debate about the ratio of oil to natural gas. And I think that that was a mistake in the past.”

“Silver has its own fundamentals. They’re pretty good fundamentals in supply and demand. Silver is a precious metal that has numerous positive elements in order to be comfortably bullish. However, it is not money. This is the important thing in a monetary debasement craziness like the one that we’re living is that the only asset that has been proven for centuries to be money is gold. And I think that will maintain the ratio high.

Will gold continue to be bullish?

“I don’t think that gold is going to be as bullish relative to the dollar because of the high shortage of US dollars that exists in the economy right now, which is about between 13 to 20 trillion.

However, global investors are likely to look for opportunities to find a good investment relative to their currency now. So Brazilian investors, Turkish investors, Chinese investors, Japanese investors, European investors are likely to see a much better return of gold relative to their currencies than relative to the US.”