Happy Friday, traders. Welcome back to our recap of the week in gold markets. Seemed like we were all falling asleep for a little while to begin the week, but we’re certainly having fun (or something like it) now. Gold prices are roughly $12 for the week (but upwards of $20 for the day) on the back of a blockbuster Friday in world markets.
So, what Kind of week has it been?
Well, here’s an excerpt from Fed Chairman Jerome Powell’s speech in Jackson Hole this morning, which I think sums up how I’ve felt about writing these weekly wrap-ups for the last month or so:
“We have much experience in addressing typical macroeconomic developments under this framework. But fitting trade policy uncertainty into this framework is a new challenge”
Same here, JP; same here.
Before I can cover the speech that we thought was going to be the market mover of the week however, we’ve got to touch on ever escalating trade war between the US and China.
Gold Prices Revived This Morning as China Claps Back
At the time of writing, gold prices have been looking to reach above $1530/oz in the sport market as US equities are down 2% on the day and yields on the benchmark US 10 year treasury hangs just above 1.5%; all of this a kneejerk risk-off adjustment by markets in the wake of trade-focused aggression from both Beijing and Washington today. The US Dollar is also weaker on the day as a result.
Heading into this morning it looked like gold’s multi-week really was finally petering out as the yellow metal finally failed to recover the important $1500 level after falling through it in Thursday’s trading.
The first lift for gold prices, and the markets’ first sign today wouldn’t go as planned, came about an hour before Jerome Powell’s scheduled appearance, as China’s Finance Ministry announced a new round of tariffs on some $75 billion worth of American goods, effective September 1st. These new tariffs are clearly a punitive response to the surprise round of restrictive tariffs that the US President unilaterally announced at the start of this month which would also have gone into effect on September 1st—a move that dealt a similar blow to global markets and a boost to gold prices.
The great shudder that ran through risk assets after that August 1st announcement did not go unnoticed by the US administration; In the time that it’s taken Beijing to calculate its response (imagine such a thing: a “calculated” response to changes in an incredibly complex, incredibly important geopolitical struggle. What must that be like?) the White House had since announced the delay of large parts of those new charges until at least December, in a move that rallied equities in the US and seemed to finally dent gold’s summer bull run.
Good thing you read clever, insightful market commentary online-- and also read my stuff—that perhaps pointed out how tenuous of a driver “optimism about trade peace” seemed to be for any market trend.
Of course, gold prices move above $1500 on the news this morning but initially only notched a gain of $10 or so in total—a rational market response to a rational (if retaliatory) escalation, you might say. So, how is it that gold is looking to close the day up nearly $30 then?
Trump’s Trade Threats Inject Uncertainty and Drive Gold to $1530/oz
One of the knock-on effects of so many of us using our cell phones as our alarm clocks these days is that it’s all too easy to get sucked into the living nightmare that is social media pretty much as soon as we open out eyes. Not that I’m suggesting that the US president has a great deal in common with the millennial set, but it does seem like this is exactly how Donald Trump’s day started. Gold’s gains by virtue of being the most risk-off of risk-off assets ran higher and equity markets’ losses ran deeper through the morning as the president live-tweeted his processing of the news out of China. The Tweeter-in-Chief was certainly wound-up form the get go and increased the de-risking impulse that lifted gold prices higher, but it was after Powell’s public remarks were released that things really got heated.
The president, incensed that Chairman Powell didn’t announce an immediate rate cut from Jackson Hole—it seems like maybe he thought this was an FOMC meeting—began to launch volleys at the Fed as well as China. As we’ve seen since last December but particularly this summer, this kind of rhetoric continues to inject volatility into markets and drive fleeing investors into gold as a safe haven. Even Trump knows that he’s used up most of his good Federal Reserve material at this point of course, so in short order his ire was refocused on China alone, culminating in an “order” for all US companies to “come home” from China; this is the move that gave gold spot prices their big push up towards $1530 and cemented at least a 2% drop in equity markets.
To be clear, the Office of the President doesn’t have the authority to actually give that order. But, because it was issued on Twitter and not through policy channels, nobody knows exactly how this president will attempt to “enforce” such a thing. It’s that uncertainty that is once again rattling markets as it did to start the month and has revitalized gold’s rally as we head towards the more volatile months of September and October.
What was initially going to be the bulk of this week’s article is now looking to get a paragraph. Maybe two. In his opening remarks for this weekend’s summit of central bankers in Jackson Hole, Fed Chairman Powell delivered the not-dovish rhetoric that we had come to expect as the week progressed. He continues to stick with the safety of the committee’s vow to “act as appropriate” for now; especially after the trade war escalation that made Powell’s public remarks this morning’s second banana, the broader market continues to interpret “as appropriate” to mean another 0.50-0.75% of rate cuts before the years’ end.
That trade war of course also played an important part in the Chairman’s language about “Challenges for Monetary Policy.” Pointing out, as I quoted at the start, that the Fed is prepared to do what it can to sustain economic expansion but that the escalating trade dispute and in particular the unpredictable nature (of at least one side of the conflict) makes that work all the more difficult. Said Powell:
“There are, however, no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rulebook for international trade.”
There’s certainly more to parse out about both Powell’s address this morning (we have a more thorough examination of it here,) and the clear emergence of differing viewpoints within the committee about whether further stimulus is needed and how much. The truth of our current situation though is that, strictly from the perspective of the gold markets, our efforts to anticipate the next decision of the Fed won’t be profitable until we can make an educated prediction about the next move in the US-China trade war that has come to dominate the pricing of our primary market.
Hey, look at that, J. Powell got a whole three paragraphs. Honestly if there’s one upside to this morning’s wild ride: it saved me from struggling to wring more than 400 words out of was an exceedingly uneventful week in the gold market for the first four days.
Next week’s macro calendar brings a little more to the data table than this week did; though not a great deal, with Durable Goods leading the pack on Monday. The more important thing to keep in mind is that with the Jackson Hole summit continuing through the weekend, the G7 Summit starting up, and the president’s willingness to tweet on the weekend, there’s a high possibility that impactful headlines could be broken while markets are closed, leading to some volatile trading when things resume on Sunday evening.
It certainly feels like uncharted waters at the moment, traders. The only source of forecasting I have for gold markets is my trusty Magic 8-Ball, the one with all the stickers on it that say, “This Is Not Investing Advice”, but it seems pretty sure that we can count on more uncertainty ahead. That uncertainty, I’d bet, would only increase gold’s upside.
Enjoy your weekend, traders. We go again on Monday. See you then!