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 relatively flat to where they began the trading week, while silver has made and maintained solid gains from where we saw it on Monday: the grey metal may be able to consolidate support as high as $27/oz before the week’s close.
This of course, belies the wild week that financial markets have experienced; One that is not easily boiled down to a couple of introductory clauses as it brought some wholly unexpected risk factors into day-to-day market operations. Maybe the best way to “tease” the recap is this: Coming in at over 1,700 words, we’re about to recap a week that included an FOMC meeting and press conference; This sentence, though, will be the only mention of the Fed or the US labor market.
So, what kind of week has it been?
Calm Before the Storm(s)
What turned into a historically weird (to use a technical term) and volatile week for US equity markets began with a mild Monday, as investors and managers bid the S&P 500 and the more focused NASDAQ 100 higher ahead of the week’s earnings reports for the tech giants that have been leading the stock market’s rallies for most of the last year. Although there didn’t appear to be much in the way of momentum towards safety to start the week, whatever protective positioning there was primarily benefited the US Dollar (which gained a bit from recent lows) and US Treasury debt; Monday’s live session saw the benchmark 10-year note’s yield drop sharply back towards 1%, beginning a week in which some traders would be cautiously eyeing that psychological resistance level as buying in “riskless” US debt held consistent pressure on the chart. Gold prices traded relatively flat, holding a line at $1885/oz through the day while silver remained similarly calm.
Gold prices shed a few dollars in another mostly listless session on Tuesday, while the key equity indices in the US and abroad mostly shaded just lower; As the week’s dominant narrative around a raid of “retail” trading activity in shorted stocks began coming to the fore, America’s stock markets were a little more up-and-down before finishing slightly in the red. Gold’s session closed around $1850/oz in the spot markets, roughly a $5 slide.
Although they would eventually take a backseat for seemingly the first time since the November elections, our consistent drivers of the markets’ sentiment—the global fight to combat Covid-19 and begin an earnest economic recovery, and the odds and timing of a new, effective Covid relief plan making its way through the US legislature—left their marks clearly on Tuesday’s book of business. Investors’ concern continues to rise as some US state and major metro areas, well ahead of a meaningful drop in the infection rate or a semi-effective rollout of vaccinations, have started lifting safety protocols; At the same time, even the European nations that seemed to best handle the virus’ contagion before the end of 2020 are seeing their infection rates spiral “out of control.” In Washington, the new US Congress has wasted no time in making it clear just how much time will be wasted in passing desperately needed further fiscal relief for the US economy as the Senate Majority Leader is reportedly setting an “optimistic” (quotes mine) goal of passing the Biden administration’s relief package in mid-March. The ongoing Coronavirus surge is the more frightening of the two narratives, to be sure, but it’s also the one that’s been with us the longest. As a result, it seems to be concern over the lack of haste in boosting the US economy (in favor of partisan pandering) that has kept an undercurrent of uncertainty flowing throughout financial markets this week even as the retail investor-driven tumult of the GameStop/Robinhood story has grabbed the headlines and forced the more acute spikes in market volatility.
Instability at the Core of “Normal” Market Operations Shakes Major Assets and Rearranges the Board
If it seems like I’m deliberately avoiding stepping into an explanation of the GameStop/Robinhood/Reddit-vs-Hedge-Funds, well…Yes, I am. At the end of the day, we don’t cover equities in-depth here except for how the relate to the metals and Dollar market trends. For a quick catch up on “what it all means,” I can recommend this great read, and this short listen. For our purposes here, all that’s really important to recap is that overall market volatility saw a huge spike on Wednesday, both during the cash-trading session and in after-hours dealing and that kind of sudden change can’t not be felt in the core safe haven assets like gold.
Of course, we can’t pin the entirety of gold’s (or, indeed, the US stock market’s) ugly Wednesday on a single trade; Plenty of other things were happening. During the overnight session, overseas markets had reacted poorly to infection/stimulus reporting in the day before, which continued and amplified the risk-off mood of the US markets. Not helped by a very poor showing from December’s Durable Goods reporting, US equities tumbled at the open en route to loss of more than 2.5% for the S&P 500 which was accelerated throughout the day by growing confusion around the surge in a select few low-performance stocks and deepening disappointment as some of the market’s golden tech mega-caps—namely Facebook and Tesla—fell sharply after reporting earnings. Trading closed on Wednesday to market the worst single-day losses since October.
In the rush to safety—from rising volatility, from faltering giants, from Reddit forums—gold’s safe haven status took a backseat to the US Dollar and, to a lesser extent, US Treasury paper. It’s perhaps understandable, as straight (Dollar-denominated) cash is historically the most direct opposite of equity market volatility; And it’s been relatively “cheap,” to boot. I also think—and this is almost entirely speculative armchair psychology—that there’s likely some overlap between those who like to trade in and out of the precious metals markets and those who might be tempted to get involved with once-in-a-cycle trades like we saw this week, especially as the frenzy continued past day one. Maybe even some of our readers? (No judgement, of course.) Under that framework, it would make sense to imagine some safer gold positions getting liquidated to accommodate more adventurous stock trading.
Regardless of the direct cause, gold prices fell on Wednesday alongside US stocks although not nearly as sharply. From previous support at $1850, the yellow metal’s spot price trended lower following a volatile cash open, wrapping the session near $1840/oz while silver hung onto support at $25. The overnight session that followed briefly brought some further weakness in the metals, but both returned to Wednesday’s closing price ahead of an especially volatile start to Thursday’s New York trading day.
The Safe-Haven Paradigm Shifts Again, The Dollar Looks Likely to Retake the Crown
Gold’s price chart exploded higher an hour ahead of US stock markets opening on Thursday, reaching as high as $1860/oz on the move. With so many related but unsynchronized forces at play in the markets and 830am (EST) generally being an active trading hour it’s particularly tough to pinpoint a single factor that drove precious metals higher; But my guess is that the spike was driven largely by a knee-jerk reaction to the release of fourth-quarter GDP estimated for the US economy which occurred at that time. While the quarterly rate of growth lined up near to expectations, a lot of the headlines framed it has confirmation of the largest annual contraction in the US since the end of the Second World War. I’m admittedly biased by my experience in the age of high-frequency trading, but my hunch is that gold’s Thursday spike was initiated algo traders swing hard into risk-off positions, motivated by the ugly (if non-comprehensive) headlines.
Whatever the reasons, gold’s rally didn’t hold. As US equity markets opened an hour later, confidence in “The System” seemed to have been restored, and stocks jumped ahead. The small-cap/big-short frenzy from Wednesday continued at a more muted pace to be sure, but the confidence of investors in general seemed to get a boost as regulators, clearing houses, and other parts of the financial plumbing were pulled in (willingly or otherwise.) The S&P 500 ultimately picked up by 1%, but gold prices benefit from the temporary change in the market’s mood and the yellow metal fell sharply in mid-morning trading before spending a languid afternoon just above $1840/oz. Silver, it’s worth noting, held much tighter to its morning gains and ended Thursday well above $26/oz.
And even as the fortunes (in some senses, literally) of the US stock market go the other way on Friday, US traders just have no love for gold this week. Overnight, the now triple-barreled impulse of uncertainty and instability in markets (quickly-spreading pandemic, slow-moving governments, and now unexpected doubts about the day-to-day function of price discovery in equity markets) sent the key stock markets of Asia and Europe’s developed economies to loses of over 1.5% across the board, and gold prices benefited mightily from the attendant flight to safety: ahead of the start of US trading, gold’s spot price had climbed to a weekly high above $1870/oz. But, while it was clear from the open that US equities would continue the downward trend—both the S&P and the NASDAQ 100 have seen losses deeper than 2% at points on Friday—gold prices once again came under strong selling pressure and investors appear to prefer the Dollar for safety. While support seems reliable at $1850/oz at the time of writing, it seems like this week may have seen a shift in the dynamics between the core safe havens as the Greenback continues to strengthen. Silver has again outperformed gold so far today, and is attempting to hold most of its Thursday and Friday gains near a recent high of $27/oz.
There’s not a lot of reason to believe that next week’s financial markets will start off in a calmer place than we’ve arrived at today—especially as the tensions that have grown so hot between retail and institutional market participants in recent days will have a full weekend to simmer. So, while we expect some volatility around Sunday evening and Monday morning’s opening bells, we also have some focal points on the economic calendar to look to: Namely, the December Jobs Report which isn’t expected to be very light reading.
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.