Happy Friday, traders. Welcome to our weekly market wrap, focused on the news, narratives, and economic data that had the biggest impact on gold prices, the Dollar, and other related assets his week.
Volatility continued to be a dominant force in the gold market this week, this time resulting in a ripping rally from the yellow metal which recouped the whole of last week’s loses and powered through to rise back above $1600/oz with considerable strength.
We saw the restrictions put in place to combat the global spread of the Covid-19 disease force a temporary breakdown in the normal logistics cycle that underpins the entire precious metals market; meanwhile, a rally in equity markets has alleviated some of the extreme selling pressure that battered gold for much of March.
So, what kind of week has it been?
Monday: Gold Recovered Last Week’s Loses Thanks to Boost from More Fed Stimulus
From Monday’s lunch hour through to the end of the US session, the steady climb higher in gold prices that we wrote about in the morning’s preview—initiated by the Federal Reserve’s pledge of “unlimited” bond purchases and other stimulus programs—continued. At closing, the yellow metal had established a position above $1550/oz.
While equities managed to at least pull above their daily lows on Monday, the Dow and S&P indices were still in the red for the session amid investor disappointment that the next massive fiscal stimulus package failed to find passage through the Senate.
The latest round of Fed plans and promises most likely saved US stocks from an even deeper fall, and it clearly impacted gold’s story as well. The idea of “lower rates for longer” is pretty well packaged in with the central bank’s guarantee to keep buying bonds indefinitely, demonstrated by benchmark yields on the US Treasury’s 10-year note dropping back below 1%. The low rate environment is usually very supportive of gold buying and it seems that some investors are already stepping in now. There are also those that believe that this torrential flow of “easy money” coming from the Fed, when restrictions are lifted and consumer spending is allowed to return to normal, will create considerable US Dollar inflation, and fast. If that’s your view, it would certainly make sense to buy gold at a reduced price as a future hedge against inflation.
The rest of Monday’s financial news was focused on accounting for the economic damage being done by the Covid-19 containment efforts and attempts to quantify the risk and/or depth of a possible recession through the medium term. Both of these narratives serve to increase risk-aversion in the markets and have lent a supportive tailwind to gold throughout the week.
Tuesday: Momentum Carried Gold Through $1600/oz as Logistical Problems Disrupted Pricing
Tuesday’s gold price action was so out of sorts that we felt compelled to drop in that morning and discuss it. To recap: as global equity markets rallied on the Fed’s “whatever it takes” moment, a rash of ugly and worsening PMI reads ran through the world’s most developed economies. With some degree of recent weeks’ liquidation pressure on gold relieved by rising stock markets, the yellow metal was given room to run higher with other safe havens as the deteriorating economic activity data sent risk-off signals. This action brought gold spot prices to the cusp of $1600/oz in the early morning hours. What followed then, and the focus of our brief Tuesday article, was a unique in the complicated relationship between physical gold deposits in London and New York, and the futures contracts that physical metal underlies.
Many in the precious metals market, we included, initially thought this dislocation was created by a breakdown in the auction mechanism that derives the LBMA’s twice-daily price fixings for gold. The whole truth is that the price volatility was created by issues in international logistics—in particular, the mass grounding of international freight flights—which threatened the smooth execution of LME and COMEX gold futures contracts. It’s a complex (at times) interaction, but fascinating for those who are interested; I find that Bloomberg’s commodities team has the best breakdown of the breakdown, here. The volatility and pricing issues’ effects weren’t limited to spot markets, as the morning’s first disruption created unprecedented size in the spread between spot and futures marks.
— Ole S Hansen (@Ole_S_Hansen) March 24, 2020
While the early morning dislocation appeared to be the deepest and created the sharpest move in tradeable stop prices—blowing gold briefly as high as $1625/oz before corrections—the logistical issues did ripple throughout the day and would bring occasional gapping in price charts over the next two days, and a general bid/ask volatility that has persisted in gold through the end of the week.
Despite the initial correction Tuesday morning, gold prices held support near $1600 and would drive higher from there throughout the day. The US economy delivered its own concerning drop in PMI activity for both the manufacturing and services sectors to add to gold’s safe haven bid. Meanwhile, US stocks continued the global equity rally, further alleviating the rush-to-cash pressure on gold and allowing the yellow metal to run even higher on Monday’s Fed announcements. Spot prices would end the day strong, closing near $1630/oz.
US equities had their own outstanding day, buoyed by the imminence of Congress’ Covid-19 stimulus bill and beginning an impressive three-day rally for US markets. The S&P picked up its largest gains since 2008, while the Dow’s 11% rally market the biggest day for the index since the 1930s.
Wednesday: As Equities Continued to Rally, Gold Pulled Slightly Back but Held Gains
Wednesday brought a calmer feel, at least relative to the last week, for the gold market. With Asian and European stocks continuing to rally, the yellow metal naturally had a bit of a downward correction overnight. Although there were signs of volatility in bid/ask spreads that persisted, a slightly smoothed-out midline chart would show gold trading steadily along a line near $1615/oz through Wednesday while silver prices retained strength above $14.30.
The major US stock indices had another strong performance as the Senate looked ready to pass the $2 trillion fiscal stimulus package, allowing equities to build towards a streak. Tuesday and Wednesday accounted for the S&P making its biggest two-day pickup since late 2008.
On the data front, Durable Goods Orders for February curiously out-performed estimates—as had Tuesday’s manufacturing data from the Richmond Fed. Neither have bought much optimism for the market however, as gold and Greenback trading largely ignored both releases. Still, when the US economy inevitably shifts its focus to recovery rather than survival, it will be interesting to see how these benchmarks hold up.
Thursday: Gold Saw Modest Gains as Stocks Shrugged Off Record-Breaking Jobless Claims
What else can you start off with when reviewing Thursday? The US Department of Labor reported 3.28 million new jobless claims, as the closure of non-essential business operations in major US metro areas choked the employment of food service and retail workers en masse. 3.28 million jobs lost in a week marks a new record for the US economy and one that sits 400% higher than the previous record. Undoubtedly we’ll see a steep drop reflected in next week’s Jobs Report, as the 4-week average trend for initial claims now leaps to 1 million.
Horrific economic toll. 3.2 million initial weekly jobless claims in one week. Previous crises and recessions are barely a blip on this chart. pic.twitter.com/DzMMhkJCMa
— Joe Weisenthal (@TheStalwart) March 26, 2020
Although I’m confident in saying that this report—and the broader events that made it possible—will make the weekly jobless claims data an attention point for gold and Dollar traders in the near- to medium-term, we didn’t see the dramatic reaction in gold prices that we might have expected. The yellow metal would trade higher throughout the day though, as it seemed that more and more investors were buying back into gold positions, either as a hedge against hoped-for inflation or as a pure safe-haven play. Gold spot traded to new weekly highs above $1640, before moderating a bit to close just above $1625/oz. Silver retained its strength just below $14.50.
In all honesty, there isn’t much else from Thursday to discuss besides that gargantuan number. With the Senate officially passing the new tranche of fiscal stimulus and quick passage through the House and the executive branch looking assured, US equity markets chose to focus on optimism rather than the brutal labor numbers. The major stock indices all continued to pick up value, turning in the S&P 500’s first three-day streak since February. While proportionally powerful rally in equities this week has lent some hope to the markets and some breathing room to gold prices, it isn’t a promise that the bear market is already over, while it does mark the kind of market volatility that could become a concern if it persists.
Friday: Gold Continues to Benefit from Safe-Haven Support as Stocks Drop Back
Sure enough, on Friday morning we’re seeing US stocks endure a corrective downturn after the last three days of big gains. Along with the headwinds of a technical correction and likely some profit-taking ahead of the weekend, outlook for the US economy has been soured again by a surprisingly strong downgrade in the University of Michigan’s consumer sentiment data.
U.S. consumer sentiment plummeted in March by the most since October 2008 https://t.co/2RRFf0C0d3
— Bloomberg Economics (@economics) March 27, 2020
At the time of writing, both the Dow and the S&P are down more than 3.5%, with the Dow shedding nearly 900 points. The Dollar is weaker as well, to close one of its weakest weeks in over a decade. We had expected the more impactful data of the morning to be March’s reporting on Personal Spending and Income, as well as the Fed’s preferred measurement of consumer inflation. Instead, all three came in broadly aligned with expectations and did little to impact gold prices.
Alongside more bond-buying that has brought the benchmark yields lower again, gold prices have been resilient near to $1625 so far today. The gains have been so strong this week that I have a hard time not expecting some degree of profit-taking that may come later in the session and push prices down a bit. That said, there seems to be very little motivation to exit safe haven positions despite the green shoots of optimism that have come over the last five trading days.
It’s also very possible that we’ll see some volatility in gold and the Dollar coming out of this weekend, but in what direction it’s hard to say. On one hand, there may be a rebound in sentiment depending on the speed with which the new stimulus bill passes the House and the President’s desk on its way to action. On the other, there’s no telling what how the spread of Covid-19 will spread through the US over the weekend, now that cities like New York are becoming some of the largest infection centers.
Alongside those unknowns for next week, we do have a few known focal points as well. Mid-week we’ll get a look at the ISM’s data on US manufacturing to compare with Markit’s dire assessment this week. Friday brings the March jobs report, which analysts are predicting will show a deep drop in the NFP and a push towards 4% unemployment.
Until then, be safe this weekend, traders. Find a little bit or joy and relaxation this weekend. I’ll see everybody back here on Monday for a preview of the week ahead.