Happy Friday traders! Welcome to your recap of the week in the gold markets.
At the time of writing, gold prices have seen a $20 sell-off from the highs but still remain firmly in the black following a strong week that saw an ounce of the yellow metal selling for the most in six years.
So, what kind of week has it been?
Gold Markets Were Summertime Calm to Start the Week
This week’s theme seemed to be about the gold market’s sensitivity to rhetoric. The macroeconomic calendar was very light in terms of tangible data points or announcements, and Monday and Tuesday’s trading reflected that. With volatility in gold (and many other assets) having collapsed through the end of last week and the weekend, it looked like everyone had settled in for the typical summer doldrums in the market. We had US economic data to begin the week, with retail sales for June strongly outperforming expectations on Tuesday morning; on Monday there were also signs that last month’s handwringing over the US manufacturing sector may have been overdone as the NY Empire State Manufacturing survey was above expectations (later in the week the Philly Fed variant of the same would be a large surprise to the upside as well.)
These positive results would knock a little bit of the shine off of gold spot, but the yellow metal still managed to trade at or around $1410/oz for the majority of the week’s first two trading sessions thanks in large part to a strong bed of support provided by persistently dovish rhetoric from Fed officials. Chairman Powell on Tuesday reiterated his comments from last week’s testimony about the uncertainties that argue for proactive monetary easing while the Dallas and Chicago Fed Presidents echoed similar views. As I talked about last week, I believe (and I still do, despite some of the record highs in gold this week) that a 0.25% cut to short term interest rates is fully priced in the markets for July 31, and for gold specifically that justifies a spot price slightly above $1400/oz with strong support. To break below support or to rise sustainably towards $1450/oz, either the FOMC will have to strongly imply that July will be a single-use insurance cut after which they will return to a pause (weakening gold), make a deeper cut of 50 basis-points this month, or indicate that they are planning to cut rates at least once more in 2019 (both of which would presumable strengthen gold buying.)
Gold Prices Lifted to Six-Year Highs by Dovish Fed and Hawkish White House
Our first example of the power of rhetoric to move the gold markets came on Wednesday. Gold prices had weakened a little more in overnight trading as it seemed that the summer lull was really taking hold, but $1400 looked to be very strong support on the downside. As the US morning got started, opportunistic buyers stepped in to the lower prices, probably encouraged by the first of several negative headlines about the state of US-China trade talks, namely the US President’s unprompted comments that he could still levy larger tariffs on China at his leisure. Shortly after the cash open for US equities gold spot prices were already back above $1410/oz.
The other set of comments that seemed to impact gold markets came from a more unexpected source: hedge-fund titan-turned-guru Ray Dalio. In a lengthy online missive, Dalio made a strong argument for much of the investable debt in the world be so low-yield as to be “worthless” and that it was time for the smart money to pivot into assets like gold. “Gold,” Dalio says, “may be key.” (Here’s the less-lengthy summary of his piece.) I don’t think that the opportunistic gold-buying that started the morning alone generated enough momentum to see prices rise to and through $1420/oz as they had by lunch time. My view is that this week’s gold rally was given a nudge by trade-negative headlines out of Washington and then give a swift kick in the tail by one of the preeminent minds in finance (who, let’s be very clear, was probably talking up his own book more than anything) encouraging investors to pivot positions into gold.
The Wednesday commentary was enough to bring gold spot prices to $1420; there would be some unconvincing attempts in the overnight sessions to move higher, but it was a level that the yellow-metal was pinned to as US traders came online for the morning. To start the day gold looked to hold in place, penned in by the opposing narratives of the return of bellicose threats from Iran around the Persian Gulf (Fear buying! Buy gold!) and the door-busting outperformance of the Philly Fed Manufacturing Index (Everything is great! Sell gold!) In a different market environment, I might argue that the Philly fireworks would be more of a market driver but in light of the Fed’s next decision being the dominant market narrative, Goldman Sachs’ FX team makes a good point, saying:
But one thing to keep in mind is that this is a Fed survey, which means Chair Powell and the various other Fed speakers would have known at least the preliminary numbers before asserting that “uncertainties…continue to weigh on the US economic outlook.
With that in mind, it makes sense that some we saw a little bit of continues US Dollar weakness in the morning and, coupled with the bullish signals from gold holding above $1420/oz, spot prices traded upward in an orderly fashion through the morning to $1430.
It’s here that we, again, saw commentary driving the gold market. In the early afternoon, NY Fed President John Williams gave a speech in which we explicitly discussed the importance of the central bank not hesitating to act quickly to support the economy if it has the means to. These remarks were almost entirely in reference to works the Williams had written in 2002; nonetheless, the market reaction was strong and as rates sold off further gold reached all the way up to $1440/oz on its way to six-year highs. The Federal Reserve’s press office would attempt to clarify the “purely academic” nature of Williams’ comments, but the many risk-off assets like gold only continued to cement their gains for the day.
Another driver of gold’s Thursday liftoff—and another example of commentary in command—was once again statement from the US President, this time announcing mid-afternoon that the US Navy had shot down an Iranian drone in the now-contentious Strait of Hormuz. With the tailwind of Fed President Williams’ (probably) misunderstood comments waning, the suggestion of heightened tension in the Persian Gulf drove gold spot prices to $1445. Shortly following the Thursday evening re-open, the yellow metal attempted a run at $1450 but was pretty severely rejected in a manner that would eventually trickle into today’s selling.
Improved Sentiment Brings Profit-Taking & Gold Selling
Coming into this morning, we saw gold pulling back from the high-water marks, but still trading with strength at an impressive $1440 level. Without a lot on the news or data docket, the market seemed to be settling down once again for the weekend. Then, at 10am EDT:
— Bloomberg (@business) July 19, 2019
Another positive economic release was apparently enough to get the Friday profit-taking by short-term traders started early; it seemed like a lot of traders, in fact, were more than happy to take some big gains and go home as gold spot prices fells sharply (but again, in an orderly way) through the morning to $1425, where it has continues to trade through the day.
Next week should be a little calmer stateside, as the macro calendar’s high points will be the month’s updates on the housing market, and the Fed will be entering it’s pre-meeting “quiet period” so we can count on a lack commentary on Fed policy from sources that matter. To watch out for outlier shocks to risk markets we may need to turn a little more of our attention internationally next week as the ECB will hold its next meeting and it expected to strongly signal further easing to come. Meanwhile, elections for the new British Prime Minister should wrap up on Monday and we can start guessing at Brexit again, and the possibility of snap elections (again) in Italy could inject even more of this global economic uncertainty that FOMC Chairman Powell keeps talk about. Across the other ocean, we’ll need to see just how far and fast the US-China trade negotiations can deteriorate under the current White House.
For now, enjoy your weekend, traders. I’ll see you back here on Monday for a look at the week ahead.