Happy Friday, traders.
For those of us that regularly spend time trading in the metals and currency markets, things feel a bit different this week, don’t they? Devoid of any big paradigm shifts in the macroeconomic and geopolitical landscapes—the Fed didn’t flip the table over, no new monumental trade deals have been reached or scuppered, nothing’s blown up—it still feels like the playing field has been reset a bit thanks in large part to the gold market’s price action. It’s felt an atypical week to be sure. Still, we begin our glance back at an atypical week with our typical question.
That is: What kind of week has it been?
Gold markets have had quite a week indeed, with spot prices trading energetically within a $25 range. While at the time of writing gold prices are trading at $1330/oz, just more than $15 off of this week’s peak, I’d argue that have been other inputs and observations this week that are even more constructive for gold markets in the near- and medium-term. Namely, that this week’s price action is a continuation of the strength we’ve seen from gold in the month of February but it also appears to have gained value this week without being the second-order result of movement in some other asset; gold isn’t up this week just because the US Dollar has dropped off or because equities are shaky—it’s up because investors are seeing the potential for higher value in the metal itself. Also a positive sign, amid some strong selling pressure on Thursday, gold spot prices have demonstrated some solid footing at support levels around $1325 (roughly, the January market high.)
Dollar Down + Economic Gloom
In trying to make a broader point about my own outlook for gold, I argued that gold prices are not up just because the major US Dollar indices are down. I’ll stand by that, but the Greenback is lower on the week and may have some trouble regaining its footing quickly. The light weight macroeconomic calendar this week provided a few small doses of confidence in the US growth picture: the NAHB Housing Market Index showed signs of a further recover from lows, and initial jobless claims moderated a bit from recent highs. But overall, this was another week of signs that the American economy could be slowing more than expected. Durable Goods Orders managed to draw near to expectations for December and above 1%, but deeper examination shows that the growth was largely influenced by more volatile, big ticket sectors like autos and airplanes while business investment and other inputs that should be the back-bone of durable good show far weaker growth. Piling on was more bad signs for the US manufacturing sector as the Philly Fed Index dropped in to negative territory, and a three-year low in existing American home sales.
Add to that news that ongoing US-China trade talks ahead of a March 1 deadline have yet to make actionable headway, and it’s actually hard to see how the US Dollar is not even weaker to end the week. If gold prices are elevated without the tailwind of a faltering Greenback, what could prices look like if the pressure continues and the Dollar starts to markedly sink against major peers like the Yen?
FOMC Minutes and Fed Speakers
We knew, of course, that the big dog on the calendar this week would be the release of the FOMC’s January meeting minutes. I’ll direct you to our more thorough recap of the event, but the key takeaway is: look for inflation. The statements and discussion mined from the Fed minutes conform with recent public remarks by Fed officials to make clear that both the hawks and the doves are looking to the next developments in US inflation in order to determine the proper path forward for monetary policy. Late next week we’ll get the latest read on PCE and Personal Income/Spending which will likely tie one way or another into the developing picture of inflation, but the main event will be on March 12 when we get the next CPI report just 8 days ahead of the March FOMC meeting (March 20.) That meeting’s statement will include updated Staff Economic Projections and it’s at these data-laden meetings that the Fed typically prefers to announce the more impactful decisions. Allowing for unknown unknowns, I wager that this 10-day stretch will be the most important pivot point for gold and US Dollar traders in the first half of 2019.
As we mentioned at the start of this week, there was an overload of Fed speakers on the docket today. While there are still a few left to speaker later this afternoon, most have had little impact on markets but I do want to make a nod toward Vice Chairman Clarida’s remarks late this morning which centered around the FOMC assessing their policy framework and “toolkit,” suggesting that the committee could be open to make changes to their policy plans including the possibility of capping treasury yields—a tactic employed by the Bank of Japan. This kind of theorizing from major Fed officials only adds to my interest in how the March meeting will play out for gold trading and broader markets.
The Fed's Richard Clarida said it’s a good time to undertake a review of how it pursues maximum employment and price stability https://t.co/1PRtRG1B3j
— Bloomberg Economics (@economics) February 22, 2019
Despite a lighter macroscopic calendar this week, the price action for gold would’ve felt like a busy five-day week, much less one shortened by the Monday holiday. I’m sure then that we’re all looking forward to the weekend ahead. We’ll have our eye on a few calendar items, like US GDP, further indications of the housing market, and congressional testimony from FOMC Chairman Jerome Powell.
Enjoy your weekend, traders! I’ll see you back here on Monday.