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 severely lower on Friday morning, following a week whose events outside of and impacting markets are impossible to summarize in a pithy sentence. The dramatic shift in market sentiment and expectation for intensified fiscal stimulus measures following Tuesday’s US Senate runoffs has rallied investors’ risk appetite, pulling them away from most positions of safety and from gold and US Treasury paper in particular.
Wednesday, January 6 2021
Given the events of Wednesday, January 6, I think we’re all aware of “what kind of week it’s been.” Probably, with the help of history textbooks we’ll remember it for a long time to come. The storming of the US Capitol Building during a congressional session on Wednesday afternoon by a mob of rioters—due more than anything, I think, to the time of day that it occurred—did not dramatically impact financial markets in a lasting way. Because this weekly piece is meant to focus on market activity, this paragraph is the only section where I’ll directly discuss Wednesday’s riot before getting on to the business of the week. I am compelled though, no matter how small this platform might be, to denounce the acts of violence and insurrection that left at least five dead, and to denounce those who aggravated and motivated them. These acts, triggered entirely by privileged anger and lies, and not at all by patriotic need, are a direct threat to the democracy which itself is a necessary keystone to the functioning of the capital markets that we gather here to discuss.
Gold Prices Take a Fall as Dems Take the Senate
Moving on to the markets: As we predicted in Monday’s preview, the dual Senate runoffs in the state of Georgia this week (thanks largely to their direct relevance to the outlook for fiscal stimulus and legislation in 2021) become the dominant factor in our key markets this week. Following Monday’s aggressive rally in precious metals prices to kick-off the new year, gold’s chart saw solid carry-over strength on Tuesday even as equity markets rebounded from Monday’s losses. In the Tuesday/Wednesday overnight session, as it quickly became clear that the Democratic Party would flip at least one of the senate seats up for grabs, the shift in market expectations kicked into high-gear.
From this point on, leading up through the time of writing this piece on Friday morning, we have seen gold (and other core safe haven assets) fall dramatically, sometimes in an orderly manner and other times with a lot of velocity. The initial drop in gold, which held through Wednesday and Thursday in the US, was to a still-solid $1915/oz in spot markets; US Treasury yields were running higher at the same time, with the benchmark 10-year note’s yield rising above the important 1% level. The market sentiment play happening here, reduced for simplicity, is this: Markets are now adjusting their outlook to account for Democratic control (if marginally) of Congress as well as the White House; investors are now pricing-in much more aggressive expectations for the size and sustainability of fiscal stimulus to combat the current economic crisis. In response, equity markets have moved steadily higher while safe havens like gold are falling (in response to the expected stimulus and pursuant recovery trajectory,) and US Treasury yields are moving higher as well (in response to the expected increase in debt issuance over the next two years to pay for the larger stimulus, and a traditional—if possibly incorrect—model suggesting that this will also drive inflation.) This impulse has been so strong in markets this week that (again, due in large part to late-session timing of events) markets largely shrugged off the acute trauma of Wednesday because in coincided with the confirmation that Democrats—and expectations for much higher stimulus spending—will take control of the Senate.
The majority if what is now a sell-off of more than $100/oz from the top has come over the last 12 hours, as markets have absorbed and accepted the egregiously late concession from the current US administration to honor the results of the free and fair Federal elections of November, and the commitment to enable the transition of power. This removal of the last barrier to projecting US legislation for 2021, which would’ve been an afterthought in any year other than the one we just finished, accelerated this week’s market trajectories.
Also weighing on gold prices on Friday specifically is what appears to be technical-driven selling after the yellow metal failed to hold serve above $1900/oz. Although the move higher in equity prices and yields has moderated in the last day of trading, gold has continued to find air pockets instead of support on the way down. At the time of writing, gold spot prices are as low as $1836/oz, threatening the mid-December lows.
Faltering US Labor Market Only Affirms Investor Expectation of Stronger Fiscal Spending
The other focal point (that we were aware of) going into this first week of 2021 was the December Jobs Report. As suspected, Friday morning’s non-farms payroll data showed a brutal loss of 140,000 opportunities for employment in the US economy, the first decrease since April. These job losses were mostly as a result of the rolling-off of the initial fiscal stimulus measures of the spring, alongside the necessary deepening of economic restrictions to combat the spread of COVID-19's November/December surge; As a result, the burden was disproportionately felt in hospitality and similar in-person service industries. In other words, jobs primarily held by the Americans most vulnerable to a continuing economic crisis and most in need of truly meaningful economic support.
This grim data set has also served to reiterate just how hot investor exuberance and expectations are running in the wake of the seemingly interminable 2020 election cycle finally coming to a close: In other times, such a hard body blow to the US labor market, with congress yet to even discuss an appropriate fiscal response much less organize one, would likely be seen as a strongly destabilizing concern and a push towards cash or other safe havens. Instead, it’s clear today that most investors are only looking at today’s Jobs Report as a further guarantee that stimulus will have to flow.
Unfortunately, the primary cause of the global economic stress driving the need for fiscal intervention across the developed world is far from abating. Indeed, even as the US and other major economies continue rolling out vaccination measures, infection rates and death tolls continue rising to new records with the US all but guaranteed to pass the grim tally of 400,000 total coronavirus deaths well before the end of the month. This gloomy counterweight, and the still inevitably rocky road to passing full-power stimulus measures in the US, will be the main dampener on the market moves we’ve seen this week; So that’s where we’ll expect to focus again in the week ahead.
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.