Happy Friday traders, welcome to your recap of the week.
So, what kind of week has it been?
Last week, I went with “energetic” as a descriptor so I think this time around I need to go one step beyond and say that the market action for gold this week has been frenetic. Also, it’s just felt like an awkward week to manage with an American bank holiday yesterday. With that in mind, and because in my household we not only celebrate US Independence Day on July 4th, but also US Hangover Day on July 5th, I’m going to keep this week’s recap pared down to the major topics that we as precious metals and currency traders have been tracking.
Gold Price Action
At the time of writing, gold spot prices head into lunchtime, and for all intents and purposes the end of the week, establishing a position to hold around $1395/oz.
In the year 2025 or so, when an analyst is looking at historical market data for gold, the price action for this week will look boring and unchanged; gold spot was roughly $1395/oz on Monday morning, where it looks like it will roughly trade to end the week. Having lived through it, of course we’ll know different.
After Monday afternoon saw (what remain as) the lows for the week at $1382, the dip-buyers stepped in fast on Tuesday. Prices for the yellow metal once again traded above $1400 and reached even higher, as the Monday’s euphoria about the US-China headlines that emerged from the G-20 over the weekend seemed to dissipate and give way to a cold realization in the markets: that there really wasn’t that much actually development made in the meeting between Trump and Xi (that markets and count on coming to pass, anyway.) More succinctly: a trade truce is not peace.
Many of the risk-on assets that had celebrated Saturday’s news, most importantly the US Dollar Index, sank back as safe-haven buying once again surged into gold positions. Gold price would once again reach the highs above $1430 Tuesday night, but mild corrective selling from that position would see it trading a neat band between $1410-20/oz ahead of and through the July 4th holiday for US markets.
As we know, on Friday morning the gold chart collapsed back below as Non-Farm Payroll numbers for June absolutely crushed expectations and the risk-on impulse rushed through assets in shallow market. The sharp drop in gold was likely exacerbated by that fact that so many US-seated traders were offline on a Friday that fell between the weekend and a Thursday holiday.
Supportive buying seems to have returned to close the week, pulling prices back towards $1400. Because that big, round number was proven this week to be pretty permissible to the up- or downside, in my estimation we are heading into next week with the next level of resistance sitting at $1410, and support at $1385. To continue its rampant uptrend of the last few weeks, next week gold will probably need to find a way to hold ground at or above $1435/oz or else it may risk a severe pull-back.
Jobs, Manufacturing, and Central Banks
Non-Farm Payrolls for June came in this morning at a blistering +224k, battering consensus expectations for 160k new jobs-added. Yes, the headline unemployment rate ticket up by 10 bips to 3.7%, but it had felt so shockingly low at 3.6% that it’s hard to convince me that any of today’s market action was in response. Hourly earnings did disappoint slightly; seemingly unchanged from May’s data analysts had be expecting a slight uptick—some sign of life. Viewed as a whole, the June Jobs Report makes a convincing argument for investors to temper their assumptions that a July rate cut is written in stone and it is my view (as well as many others’) that that wavering in market sentiment has been the primary driver of gold’s sharp fall this morning. We’ll come back to the Fed shortly.
The dominant headlines for market participants these last few weeks have (rightly) been about the US-China trade war, tensions around the Persian Gulf, and attempts to anticipate the Fed. Meanwhile, a quiet undercurrent that we’ve touched on once or twice is just how rough recent assessments of the US manufacturing industry have been. ISM’s Manufacturing PMI read managed not to disappoint expectations (helpful,) but did still reflect a decline (not that helpful.) As Ryan Page points out, the service sector-specific PMI also showed weakness.
News flow directly out of the major central banks was light this week, but there were some personnel decisions made. The White House announced the nominations of two new governors to the Federal Reserve, both of who are considered dovish (pro rate-cuts, bullish for gold) and one of whom has actually argued for returning to the gold standard. The president has been openly antagonistic against the current FOMC and its chairman (who, again, the president himself appointed,) and nominations to the central bank have to be viewed through that lens. Still, I would argue that good traders, especially in gold markets, should be positioning around anticipating and interpreting the views of the Fed itself and not the views of the president with regards to the Fed—to do it the other way around would be a fool’s errand. The great Josh Brown concisely explains why:
It's the strongest economy ever, so we need to do a rate cut, but also we should put inflation hawks and gold nuts on the Federal Reserve, and also I want a weaker dollar immediately.
This is literally the economic message from the White House right now.
— Downtown Josh Brown (@ReformedBroker) July 3, 2019
In other central bank news, after some debate and horse-trading that was more contentious than expected, current head of the IMF Christine Lagarde has been tapped as the successor to Mario Draghi as ECB President. There will probably be more to unpack about this in the coming months as the European Central Bank flirts with taking up more QE and/or rate cuts, but the bottom line for now is that Lagarde is expected to see the ECB broadly moving in the same direction as Draghi so her election shouldn’t throw any of the bank’s forward guidance into doubt.
In the week ahead, expect the gold markets to be Fed-focused. Wednesday will come with the release of June’s FOMC meeting minutes as well as the congressional testimony of Chairman Jerome Powell; Thursday brings an updated read on US inflation. We’ll also be looking to see if, with everyone back from the holiday, we get any more progress on last weekend’s vague pronouncements around US-China trade negotiations. But don’t count on it.
Until then, your weekend traders! (If you’re not already on it.) I’ll see you all back here on Monday to game-plan for the week ahead.