Happy Friday, traders. Welcome to our Friday market wrap of this week in gold markets and their correlated assets. Gold prices have been unable to recover their marks from Monday, but after a turbulent (and at times confusing) week of price action, the yellow metal is ending the week firmly on the front foot having recovered from weakness driven by demand concerns.
So, what kind of week has it been?
Gold Prices Hung On Through Monday’s Rout of the Commodities Complex
When our Monday preview post went up, European markets and US equity futures were shrugging off a deep drop in China’s mainland stock markets—their worst single-day plunge since 2015, but still within the bounds of what was expected—and the broader commodities complex was getting hammered on fears around near- to medium-term demand from China—the world’s single largest consumer of raw materials—in the eventual aftermath of the new coronavirus’ spread.
Much of the commodities group saw heavy selling on Monday led by crude oil futures falling below $50/barrel, but gold prices on the day managed to hold the line from the yellow metal’s overnight selling, despite the particularly bad rounds that base metals like iron ore and copper were experiencing. Gold’s low pricing of the day came in the morning as equity markets’ cash open saw the rallying continue, and the latest read on ISM Manufacturing PMI came in above 50.0, signaling expansion in the sector rather than contraction, for the first time in six months. Increasing risk appetite pushed gold lower but the chart found buyers stepping in at support to lift prices back to $1575/oz and above.
While US stocks and the Dollar turned in a strong performance to begin the week and the overall slump in commodities was applying some drag, gold prices maintained support as better news around the burgeoning global health crisis was slow in coming.
Rallying Markets on Tuesday Drove Risk Appetite Higher and Gold Prices to the Lows
As Tuesday’s trading got started, there was initially some concern that markets would spin out under pressure from the novel coronavirus’ continued spread in Asia and spot appearances in other parts of the world. But, despite some worrying rhetoric from the top of Chinese government, the mainland markets set the tone for the day when they avoided a repeat of Monday’s sell-off.
European risk markets would take the Asian sessions lightly optimistic momentum and run with it, and the rally carried through to the US session with strength. As the Dollar was lifted alongside, the S&P 500 notched a two-gain of well over 2% and US stocks in general saw their largest gain since last August. Even emerging markets equities saw a mild rally, as reported emergency talks among OPEC+ members helped crude oil prices rebound from Monday’s turmoil.
Like you would expect to see in this environment, gold price were forced to the backfoot throughout Tuesday: hanging just above $1560 ahead of spot US trading, the yellow metal was pushed all the way down to $1550 at the height of Tuesday’s risk-seeking just as selling in bond markets saw the benchmark 10-year’s yield climb back above 1.6%. The $1550 level would prove itself as a reliable area of support for gold through the week, but on Tuesday prices found no joy attempting to rally back above $1555 in the afternoon.
Wednesday Saw Gold Prices Recover from Weekly Lows
The Tuesday-into-Wednesday overnight session saw gold prices moving with some added volatility, as what has been a steady rise higher, through Asian market hours, from the low 50s to $1560/oz and above was dashed sharply back to support during the late European morning. Absent any other clear drivers, it the collapse was correlated with sharp, immediate risk-on selling of US debt that saw 10-year yields jump five bips higher.
Gold’s buyers stepped in again at $1550 support, and the spot price began a steady march higher through the start of US trading. The yellow metal avoided deflating in the wake of another lofty ADP Payrolls number. Amidst the opposing market narratives of US authorities increasingly vocalizing concern over the novel coronavirus’ spread, and the stock markets’ excited reaction to news of concrete progress towards a viable vaccine, gold climbed higher alongside equities and by mid-morning in New York was only just below $1560/oz. As it became clear that US stocks would close out the day at new (yawn) all-time highs, the yellow metal lost a bit of its luster and momentum in afternoon trading but still managed to close around $1556/oz having survived the low point of the week.
Suggestions of Strong Demand for Gold in the Near-Term, Prices Rally Higher
Asian stock markets gained ground on Thursday’s book of business, and Chinese markets in particular looked healthier and happier about the news that China will still uphold its promises to reduce its tariffs on the US by 50% next week, as agreed to in the US-China “phase one” trade deal. As they had all week, European stocks carried on with the feel-good rally, reaching new highs of their own. Despite the continuing rally in risk assets, gold spot prices began a steady march higher in the European morning that would continue until the metal reached $1566/oz in the early hours of New York trading.
I suspect that Thursday’s improved optimism around Asian markets was also lifting investors’ outlook for medium-term gold demand and thus encouraging buying; though it’s also possible that speculators were viewing the hopefulness of the last couple days as a point at which to lever into “cheaper” gold prices ahead of a possible further deterioration of conditions and/or containment in China. Time will tell.
Thursday itself was relatively light in terms of (relevant) news flow during US trading hours, and so gold prices ran flat along $1565 through the day even as stocks and the Greenback put together another strong session. Gold’s flattened trajectory would make a mild shift higher in the afternoon and close near $1566 and a $10 pickup for the day.
Fed Warning About the Economic Risk of Coronavirus’ Impact Have Driven Gold Higher Today
After some overnight chop to close out the week, gold prices flowed into the final US trading session of the week at roughly the same level, just ahead of the January Jobs Report. As you’ll know by now, the NFP number was another shockingly strong beat on expectations. While the headline unemployment rate crept up to 3.6%, that’s statistically pretty meaningless given how historically low the level has been for several months; so it was a little odd to see gold markets run $7+ higher in response to the data. Having talked with some fellow traders about it this morning, there seemed to be some who blamed computerized algo-traders for the buying that looked like a risk-off swing, reacting solely to an unexpected rise in unemployment, no matter how small. I do believe there was some degree of such buying. But reading into the Dollar’s reaction to a lackluster level of wage growth in the report is, I think, more instructive with regards to gold prices trading up to $1570/oz this morning:
Tepid dollar response from a torrid jobs report https://t.co/6I0sR0ol0x
— ForexLive (@ForexLive) February 7, 2020
Whatever was the dominant driver, it initially seemed like another short-lived rise as gold’s sport price drifted back down to $1565 nearly as fast.
In the hour since, however, a more tangible sense of risk-aversion has settled into the marketplace to close out the week. In the Federal Reserve Board’s report to Congress, published ahead of Chairman Powell’s regular congressional testimony next week, the central bank made a clear effort to highlight the coronavirus outbreak as a “new risk” to their outlook for growth in the global economy. At the end of week that has seen typically opposed charts like gold and equities trading higher alongside one another, today’s warnings from the Fed have driven a risk-off response that is more like what we’re used to: gold prices have risen (back to $1570/oz,) along with other non-Dollar safe havens like Treasuries, while equities have ended Friday in retreat.
Next week’s planned calendar is a quiet one. Early in the week we’ll have Fed Chair Jerome Powell’s congressional testimony, but (especially seeing how markets digested the report published today) Powell is unlikely to say anything provocative in those hours. Towards the end of the week we’ll have updated number on consumer inflation, and then retail sales data to round it out on Friday. Of course, we all know by now that whatever developments arise in and around China this weekend will be the dominant player in next week’s market momentum come Monday.
Until then, get out and enjoy your weekend, traders. I’ll see you all back here on Monday for a preview of the next week ahead.