Happy Friday, traders. Welcome to our first recap of 2020—and what a way to kick things off.
Gold prices are trading near four-month highs, having gained well over $30 to the ounce this week. The yellow metal’s rise was spurred initially by an overall increase in demand throughout the commodities complex, and then slung higher by the sudden return of geopolitical tension to the economic narrative. To end the week, gold spot prices look to close just below $1550/oz, where the chart seems to have found a strong level of resistance; silver is back to $18/oz.
So, what kind of week has it been?
From the perspective of the global economy, gold’s moonshot of a week to kick off 2020 has been driven by a real “good news, bad news” situation: the US President’s assertion that initial components of a trade deal will be signed in January, while still unconfirmed by the Chinese side, boosted the positive outlook that characterized the markets to begin the week while possibly increasing demand for gold in the medium term; and, of course, we’re ending the week under the tension of the US and Iran once again toeing the edge of conflict.
The Bad News: Global Markets Go Risk Off as Iran Promises Retaliation for US Military Strike
News broke Thursday night, around the start of the Asian trading session, that a US air strike in Iraq, ordered by POTUS, had targeted and killed a high-ranking Iranian military official. The sudden escalation of tensions that had lowered to a hum since this summer between the US and Iran sent markets reeling right away: while equity markets dropped sharply, crude oil futures burst higher and the already elevated trading price for gold was pushed to $1550/oz and a four-month high point.
The environment of animosity has continued through Friday’s US trading session with stocks lower in earnest, along with Treasury yields as investors pivot into the safety of government bonds as well as gold. Iranian leadership is vowing ‘severe retaliation’ to Washington’s aggressive action, although given how 2019’s economic sanctions have already crippled their economy their options—short of a military response that would only worsen the situation exponentially—seem pretty limited. That, combined with the general acceptance (if not support) of the strike from key US allies, leads me to think that chances are good that both sides might pull back from the brink in the coming days. That said, it will take several paces to cool things down to that point, whereas it will only take one bad step to ratchet the potential for open conflict even higher.
The Good(ish) News: Optimism for Trade Peace & Global Growth in 2020 Boosts Gold, etc.
Of course, while the fear trade has driven gold prices to these lofty levels just below apparent resistance at $1550, it was the positivity trade that accounted for the first $15-20 of the yellow metal’s rise this week. While you would struggle to find may reasonable market observers who are predicting a repeat of the stellar 2019 that many major assets had, it would be equally difficult to find those who are predicting a market collapse or major recession. With that in mind, the outlook for large parts of the commodities complex, and growth in global economies outside the US saw gold spot prices on the rise driven by expectations for an uptick in demand in the short- to medium-term as well as some weakness in the US Dollar against major trade partners.
The movement higher was accelerated just after Wednesday’s market holiday, with the claim from Donald Trump that the US and China would be signing the “phase one” trade agreement on January 15. While cooling in the lengthy trade war between the world’s two largest economies would certainly be a boon to risk appetite and many of the assets that typically have a negative-correlation to gold prices, it seems likely to also support a rise in the Chinese currency as well as China-based demand for gold. To be sure, the bright red asterisk on these headlines is that China, as of Friday afternoon, has yet to confirm the signing date.
The escalation of military tension around the Middle East has pulled focus from this particular story, and indeed from the feel-good attitude that lead most of this week; but we’ll be keeping a close on whether the Chinese delegation corroborates the White House’s schedule or not. And I do believe that these currents are persisting below the surface so, if we indeed in short order see a pullback from the brink between the US and Iran as I believe we might, these drivers that have supported gold-buying without threatening to destabilize the global economy, will keep gold prices elevated.
Just barely noticed amid all of the geopolitical tension, we had a couple points of macroeconomic interest on the calendar today:
- ISM Manufacturing PMI unexpectedly fell further into the contractionary zone, again.
2019 ends with the weakest reading for ISM manufacturing since the Great Recession ended/expansion began in 2009 (47.2). New orders & production also weakest since 2009. Backs up #Fed study showing tariffs are hurting, not helping US factories.
— Michael McKee (@mckonomy) January 3, 2020
- The discussion minutes of the Fed’s December meeting were released; they solidified the outlook for short-term interest rates to remain unchanged through 2020.
Our first full week of 2020 will still be a bit slow on the data front, although it will end with some weight as we get the newest Jobs Report on Friday. Of course, it looks like trade- and conflict-based headlines will dominate gold and Dollar markets next week just as they have for the last few days, so we will keep our focus there as well.
For now, enjoy your weekend, traders. I’ll see everybody back here for our first full-week preview of the gold market’s newest decade.