Happy Friday, traders. Welcome back to your recap of the week behind us in the gold markets.
At the time of writing, gold is maintaining its gains from Monday’s trading and cruising towards a sixth-consecutive winning week, with spot prices trading neat $1512/oz.
So, what kind of week has it been?
Gold Prices Consolidated in a Pessimistic Global Market, But Seemed Listless
To pull back the curtain a little bit in a completely unnecessary way, I’ve been struggling with how to talk about this week’s trading. The basic math says that, at time of writing, the gold spot market is just more than $10 stronger than it was when we published Monday’s post—effectively flat to the Monday market-close; there have only been a handful of notable headlines and a few unexciting macro data-points. And yet, it feels like this week has lasted for 11 years. I’m sure I’m not the only one who feels that way! So, let’s talk about it; it’s healthy, and besides: the editors pay me to do it.
As I said, this morning gold is basically holding onto its gains from Monday’s book of trading. The skittish, risk-off feeling that was building that morning continued through the day as major equity markets were selling-off across the board. Recent uncertainty about the US-China trade war and the American economy, and the current administrations’ ability to manage (or at least understand) either risks continued to weigh on investor confidence and more peripheral concerns were beginning to mount as well: protests in Hong Kong, already a human rights issue, were beginning to threaten commerce in the important Asian financial hub; investors were flooding out of Argentina in the wake of a shock primary loss by the market-friendly President Macri; and the threat of government shakeup (again) in Italy raised concerns about the stability Europe’s core (again.)
Without any major data or headlines to begin the week, this general sense of worry in the market led to consistent risk-off positioning throughout the trading day, resulting in a steady run up to $1510/oz for gold by the ounce. In the Tuesday sessions for Asia and Europe, both regions would see continued equity weakness which, combined with increasingly concerning signals from bond markets such as the yield on the US 30-year bond falling towards record lows, accelerated the fear trade and drove the yellow metal to fresh six-year highs above $1530.
Seeing an opportunity, short-term gold traders opted to take some profits on the overnight highs and had done some steady selling by the time US-based traders came online for Tuesday. A slightly stronger than expected showing for US inflation boosted the US Dollar’s prospects that morning and so gold prices were already drifting lower when the White House surprised and excited markets by announcing a four-month delay on many of the punitive tariffs on Chinese goods whose announcement two weeks ago had gutted market hopes for trade peace in the near term.
As the US Dollar regained some healthy color and equity markets sprang back in celebration of the initial headlines, gold charts plummeted. In the spot market, the metal fell as low as $1486 support but buyers quickly stepped-in to bid prices back to $1500. Within 24 hours of trading, spot gold was back to the $1515/oz level where it roughly trades going into the weekend.
Through the rest of the week we’ve seen gold mostly chop sideways with a few somewhat weak attempts to get a toe-hold north of $1520. Rather than try to make our usual re-mapping of the week an interesting and coherent read, I want to take a different approach this time and touch briefly on the three main factors from this week that gold traders should keep in mind heading into the next: the postponement of additional tariffs on China, a week of better-than-expected US economic data and, briefly, the inversion of the key US debt curve.
The Tariff Rollback
Market action at the core of this week seemed to be centered around the sudden Tuesday morning announcement that the White House will partially delay imposition of the new round of tariffs on Chinese goods until December rather than next month, and the market’s reaction came in two distinct parts: the celebratory knee-jerk reaction to headlines, and the more disappointing digestion of the facts. We saw the first move on Tuesday celebrating the announcement as global equities recovered and a more risk-on attitude pulled back some of gold’s recent gains. On closer look however, the news isn’t as good as hoped.
For one, the announcement was not a cancelation of the newest round of tariffs; it’s only a delay, and only for some goods. So, there are today still more obstacles to trade peace than there were before Donald Trump’s announcement two weeks ago. Further, while the step back suggests that the administration may be sensitive to the risks to the American economy that come with repeatedly escalating the trade war, the Chinese Ministry of Finance’s subsequent belligerent statement-- that the White House was directly contradicting the two sides’ agreement at the G20 summit and would suffer retaliation—suggest that the US trade delegation (or at least their leader) may have pushed things too far for China to be willing to play ball at this point. Lastly, as the research team at Goldman Sachs points out, none of this does anything to actually repair the trade relationship:
“…to the extent that the delay was driven by US business concerns, it does not necessarily represent progress in the trade talks themselves.”
Speculative traders with short-gold positions on early this week may have made some money, but I think we head into next week with a still-on-fire trade relationship between the world’s two largest economies providing a firm tailwind to gold prices.
The Improving US Economic Data
As I briefly touched on above, CPI inflation for the month of July came in slightly above expectations, and it wasn’t the only outperformer in the US economy this week. Two primary Fed surveys of the health of America’s manufacturing sector, the Philly and Empire State indices, both delivered optimistic indications of growth on Thursday while the same month’s Retail Sales data suggests that the American consumer is still broadly doing their bit to support economic expansion. Yes, there were less-positive signals as well—an uptick in Initial Jobless Claims, and worse than expected readings of consumer sentiment. Still, conventional wisdom holds that those data-points are far less relevant to the Fed than CPI and metrics of manufacturing growth.
That’s not to say that you should expect Jerome Powell’s public comments next week to amount to some kind of “I told you so;” to be sure, influential figures on the FOMC are still signaling their tilt towards a further dose of monetary easing on the heels of the last two weeks. It does, however, argue that deeper rate cuts are not a given for September and for as long as that sentiment persists there could be a cap on gold’s upside potential if improved data continues to roll in.
The Inverted US Yield Curve
If you were anywhere near a tv or radio covering the markets on Wednesday or Thursday this week, all you likely heard about was the brief boogey-man inversion of the 2s-10s spread for US Treasury yields. Despite its prominence in the headlines and Donald Trump’s twitter feed I’m mentioning it last out of these three for a couple reasons; the most important being this: I am absolutely not a well-informed bond trader and my commentary on the debt markets would be unhelpful enough to you as to probably be dangerous (that, of course, doesn’t make me much different that most pundits on TV or, to be fair, the President.)
What I will say is that the gold market has been remarkable unbothered by it. While the equities markets spasmed on when the curve inverted on Wednesday afternoon and yield on the 30-year bond’s yield collapsed to a never-before-seen sub-2%, gold markets didn’t move more than a few Dollars up or down in an environment where I would’ve predicted a rip higher for the yellow metal.
So, what does that mean? One of two things, as best I can tell: either the gold market, to whatever degree it has a collective mind of its own, doesn’t by that this instance of inversion is the doom signal that the economy has feared; or else there is some series price fatigue in gold after six consecutive weeks in the green. Either way, while I’m not ready to call a top in the gold trend just yet this week does have me starting to look for the hints of one.
Next week, while we’ll continue to monitor the broader narratives of the US-China trade conflict and growing worry and instability in other key economies of the globe, the majority of our focus snaps back to the FOMC meeting minutes from July released on Wednesday head of the start of the Jackson Hole conference and Fed Chairman Jerome Powell’s public remarks on Friday morning.
Gee, do you think he’ll have much to talk about?
Enjoy your weekend, traders. I’ll see you back here on Monday for a closer look at the week ahead.