Happy Friday, traders. Welcome to our weekly market wrap, where we take a look back at these last five trading days with a focus on the market news, economic data and headlines that had the most impact on gold prices—and may continue to into the future—as well as the charts for silver, the US Dollar and other key correlated assets.
Gold prices are trading with strength well above their starting price for the week. Both gold and silver have seen a steady climb through the week with few deviations from the path higher. At the same time, the US Dollar has weekend, bolstering gold’s role as a primary safe haven in the final weeks of 2020.
The yellow metal’s gains have been driven by three key factors. As the market has moved consistently up and to the left all week, rather than recap the trading week day-by-day, what follows is a commentary on those factors.
So, what kind of week has it been?
The Fed Promised Ultra-Dovish Policy for the Foreseeable Future, Hinted at Hopes for a Better, Vaccinated Future
The final FOMC meeting’s public statements played out almost entirely in-line with broad market expectations this week, as the analysts’ and investors’ read on the Fed’s outlook and toolkit at the end of 2020 is borne out to be accurate. Ultra-low interest rates from the Fed remain in place, and will for the near- to medium-term; And the FOMC also adjusted its forward guidance on the massive rate of bond purchases being made to support the economy, tying its current volume to the inflation and employment targets of the Fed, as has been the case with the current near-zero policy rates. These announcements, and Chairman Powell’s usual post-meeting press conference, served this week’s upward trend for precious metals prices in two key ways. Primarily, effectively guaranteeing both ultra-low interest rates (and thus, yields) and large-scale bond purchases by the central bank locks-in a very dovish monetary environment in which gold prices traditionally thrive; This encourages new buyers now, and continues the positive feedback loop. In a more recent development, the Fed’s guarantee of super easy monetary policy for the whole of 2021 and very possibly 2022 has also accelerated the US Dollar’s weakening trend; With plenty of cause for investors and managers to seek out safer positions (a slumping US economy, the continuing pandemic,) a shaky Dollar is drawing even more buyers to gold.
It’s not all doom and gloom for the US economy’s next year, of course. The updated round of staff economic projections from the Fed were appreciably more optimistic this time around, reflecting the advent of Covid-19 vaccines. While the FOMC sees better economic growth for 2021 in total as likely, the next couple months are still expected to be very rough—a grim truth underlined by this week’s data on the US labor market and holiday season retail sales.
US Economic Data Continued to Worsen this Week, with Little Signs of Optimism
There’s not a lot of nuance to covering this week’s economic data; It was flat-out bad, and reflective of just how crucial a point the US economy has come to in desperate need for fiscal support to keep its consumers and small businesses afloat until an effective vaccination plan can be implemented and results can be reaped. Retail Sales for November dealt the first blow, reporting a pullback of more than 1% in retail spending as Americans stayed home as a result of lockdowns or outright fear of the virus that has been killing more than 3,000 people each day. While a decline was expected, the depth of the actual drop was more than twice what analysts expected; The prior month’s modest gains were also revised to report a contraction.
The US’ deepening slowdown was highlighted again on Thursday, with the highest number of initial jobless claims reported in more than three months. The 885,000 newly unemployed Americans brought the four-week trendline back above 800k. The steadily growing drumbeat of concern has diminished the market’s risk appetite at a similar pace and, with the US Dollar looking less attractive, boosted gold buying. It has also made indisputable the reality that the American economy needs a large, meaningful push of fiscal stimulus if we are to make it through the first quarter of 2021 without a brutal recession.
With No Funding Bill or Stimulus Package Passed, Financial Markets Remain in Thrall to the Uncertainty of Congressional Gridlock
More so than gold or the Dollar, the charts for the key US equity indices this week have reflected the impact that government funding and fiscal stimulus talks—and the dire absence of an agreement—have weighed in the financial markets. While not rising as steadily as the precious metals through the start of the week, stock markets generally gained this week despite horrific numbers of Covid-19 deaths around the world and unambiguously negative signals coming from US economic data. The reason for each move higher was always the same, enough to become rote and cliché: “Markets up on stimulus hopes.” Surely, the deal was getting done.
At the time of writing, it is Friday afternoon and despite reports and press conferences and promises, the US legislature has been unable to agree on a deal even to fund the federal government past midnight. Having been lifted higher all week on “stimulus hopes,” the Dow Jones Industrial average is down 200 points today. The S&P is off well past 0.5%. While there’s still time through the weekend, it seems certain that nothing will be done before financial markets close. Instead, investors will have to follow the developments over the weekend and will likely have to contend with a burst of market volatility when global trading reopens on Sunday evening. I think this is the reason why today’s “acute” fiscal concern has been supportive of gold prices, but has not seen a rally higher above $1885/oz. Nobody seems comfortable placing new bets when we don’t know what to expect on Sunday/Monday.
Following what might be a frenetic open to global trading, next week’s market liquidity and headline-flow will both be light, as is always the case on the week of Christmas. Most of Europe’s trading will be offline or automated through the new year, and after placing stops on Monday I expect most of the US traders to quiet down as well. While we can count on cases and death with continuing to climb, we can be certain of little else until Monday.
For now, traders, I hope you can get out and safely enjoy your weekend for the next couple of days. After that, I’ll see everyone back here on Monday for our preview of the week ahead. If I won’t see you for the next couple weeks, I wish you all a very happy holiday season, and a blessed start to the new year.