Happy Friday (the 13th!!), traders. Welcome to our weekly market wrap, a look back at the price action, economic data, and market narratives of the week with a focus on gold, the Dollar, and their correlated assets.
Gold prices are down again today, staggeringly putting in a loss of more than $150/oz this week as the yellow metal has been pummeled, alongside collapsing stock markets, by the three powerful corrective forces that we have been marking for weeks: broad selling in the commodities space, and investor preference for sovereign US debt supported by the assumption of Fed intervention, and—most dramatically—the frenzied rush to grab liquidity by selling any gold value for cash.
So, what kind of week has it been?
Gold Flew High to Open the Week, but Market Panic Melted Its Wings
The global markets’ re-open on Sunday evening was dominated by investors and asset managers scrambling to asses and reposition in light of the fractious price war that suddenly kicked-off between OPEC+ members over the weekend. In chaos, gold prices briefly moved above $1700/oz. Looking up from this afternoon’s pricing levels, we know this was ultimately a feint ahead of five days of consistent selling pressure on the yellow metal. After Asian markets brought gold prices down from the highs, the charts for the day would trade relatively choppy with a midline around $1675/oz, roughly in-line with last week’s close.
It was clear from Monday’s start that of our three factors weighing gold prices down amid the market turmoil, the strongest opposition has come from investors’ intensifying need for liquidity in the form of cash. As markets roiled and major indicators began flashing recessionary signals, gold prices were clobbered as attitudes shifted from “risk averse” to “sell what you can.” As we’ve discussed, with gold prices at multi-year highs the yellow metal was already a prime choice for liquidation. The pressure to sell gold was further intensified at the US equity market open on Monday as, for the first time—but not the last—trading was temporarily halted when the S&P 500 fell more than 7% triggering the index’s “circuit breaker.” With no options to liquidate stock positions, however briefly, gold had to be sold and it was.
The other key headwinds for gold were also in play Monday. The markets’ preference for other safe haven assets was on display as the Japanese Yen tore higher helping sink the US Dollar to 13-year lows. Meanwhile, investors fled into the assurance of US Treasury debt (and the presumed “Fed put,”) so ferociously that the 10-year’s yield dipped below 0.5% while, for the first time in history, the entire US yield curve was valued at less than 1.0%.
— Joe Weisenthal (@TheStalwart) March 9, 2020
At the same time, the sell-off in the broader commodities complex led by crude oil’s deepest slump in decades anchored the gold chart lower as well (although silver’s sensitivity to this factor is historically much greater, as demonstrated this week.)
Bear Signals for Gold as It Failed to Participate in Tuesday’s Brief Recovery Rally
Tuesday’s book of business reflected a somewhat expected correction from Monday’s hysteria. While the number of new Covid-19 cases in Europe was spiking—and along with it, global governments’ list of restrictions in the effort to curtail the virus’ spread—the Greenback stabilized and began to rally off of its floor while sellers stepped in to balance sovereign debt markets and brought the benchmark 10-year Treasury Note’s yield back above 70 bips.
Meanwhile, US stocks had a frenzied session, whip-sawing between gains and losses for the day before a spastic rally towards the day’s end to finish in the green with the S&P 500 gaining around 5%. Whatever optimistic buy-signaling there was in the market came largely from speculation and rumor around a package of economic stimulus measures that would be announced by the White House (despite a very real lack of substantiation at the time.)
The spot chart for gold was downright placid compared to how equities were trading. While many of the other major assets that got routed on Monday were seeing some form of mild recovery, gold prices traded calmly lower throughout Tuesday to end the session near $1650/oz.
Also on Tuesday, tensions continued to rise between Saudi Arabia and Russia over crude oil productions and prices. It’s clear that this new and wholly unwelcome conflict won’t be sorting itself out quickly, but the carnage laid to stock markets this week has pushed the issue to the back-burners of the market narrative. For now.
Global Investors Sold Everything—Including Gold—in a Rush to Cash as the Bear Market Arrived
Trading during the Tuesday/Wednesday overnight provided another false dawn for gold prices, and the spot market was given room to move back towards $1670 in a session denoted by the government of Italy—still the hottest zone for the Covid-19 virus in Europe—announcing the forced closure of all businesses aside from grocers and pharmacies, and an emergency rate cut from the Bank of England matching the Fed’s 0.50% slash from last week.
The gold bulls’ day didn’t last though, as Wednesday’s US session saw the World Health Organization officially declaring a global pandemic (which the markets had admittedly priced-in as early as last week, I think,) and the slow realization that the rumored White House stimulus package wasn’t going to be coming. US stock markets sank precipitously throughout the day and—as we have become acclimated to this week—gold prices traded lower in step falling below $1650/oz.
Hoping to calm the worsening stock market, the White House announced an address from POTUS would come Wednesday night, but it did little to help. Gold prices saw their most volatile trading of the day heading into the equity market close, as the Dow Jones Industrial closed 20% below its February low, ushering in a bear market for the index and putting a technical end to the longest running bull market in the history of American markets. The S&P 500 only barely avoided the same distinction, albeit only for another day.
Donald Trump’s address to the nation on Wednesday evening, certainly aimed at calming the fear of not only the populace but financial markets as well, was unhelpful at best and disastrous at worse. Investors, analysts, and asset managers with their statements and their trades roundly dismissed the speech that announced a unilateral ban on travel from Europe and nothing else in the way of aid or stimulus.
The European travel ban (and generally hopeless mood following POTUS’ appearance) pushed global markets into bear territory along with the Dow. The markets’ mood was unaided by the ECB surprising many in announcing a decision to leave interest rates unchanged in stark contrast to their American and British counterparts. Amid the deepening sell-off in equities which further exacerbated the flight into cash liquidity, gold prices sank to just above $1610/oz going to into the US market open.
US stock markets opened, and the floodgates opened with them. As equity values cratered in a “sell what you can” swing, gold spot prices plummeted through the major psychological support of $1600 to a floor below $1580/oz.
Midday, stock prices were raised off the floor and gold prices alongside, as the Federal Reserve announced a plan to inject $5 trillion worth of liquidity into financial markets this month in an effort to combat “disruptions.” The reprieve ultimately was a brief one however as the optimistic rallies were reversed by the end of the day: the S&P 500 index ultimately joined the Dow in a technical bear market, and gold sank to lows near $1575/oz.
Gold prices had fallen nearly $100/oz for the week, and US stocks had just endured their worse day since 1987’s Black Monday.
Recovering Equities and Lagging Gold Indicate the Yellow Metal May be Lower for Longer
As we close out the week, Friday’s trading as continued to push gold prices lower although it’s possible we’ve found the bottom here—unbelievably just ahead of $1500/oz. The yellow metal was a bit buoyant in the overnight sessions as Asian and European equities seemed to have found rallying momentum off of floors of their own. But when that optimism was dashed as US indices briefly reversed into negative territory late this morning, the flood into cash from any valuable asset spun up once again and pulled another $35-40/oz out of gold’s spot price.
In the hours since, we’ve seen American stock markets once again turn towards the good—currently looking to pick up over 5% on the day—while gold prices remain stuck to the floor. This is a signal of a trend that I suspect we may see in the coming weeks as (hopefully) global governments and the markets navigate the crest of Covid-19’s spread and enact a recovery from its economic damage. With gold prices having followed stock values lower (for the reasons we’ve covered well by this point,) if investors become confident that markets have put in a bottom in the coming weeks I suspect it’s very likely that buyers will step farther into “cheap” equities rather than gold (which is still relatively expensive vs. a year ago.) In this dynamic, we won’t see the rally in gold prices that we will in stocks. It’s a hunch for now (and this is certainly not investing advice,) but it’s a strong one.
This Week’s Economic Data
While the market narrative was again dominated by Covid-19 and its impact wreaked on the global economy, our team continued to cover the most important economic data released during a light week. It had little tangible effect on the markets this week, but will certainly be relevant again once our eyes are turned towards recovery:
- Consumer price inflation slightly outpaced expectations for February and remain within a healthy (if unimpressive) range in regard to the Fed’s inflation outlook
- Conversely, PPI saw an unexpected contraction adding to worries about the US industrial sector and will need to be monitored
- And, due mostly to the turmoil in stock valuations even before this week, US Consumer Sentiment pulled back as expected in the initial March survey.
We have the March FOMC meeting next week, overshadowing the rest of the data calendar; whether or not the Fed decides to cut rate for a second time in as many weeks in an effort to support financial markets will be the dominant question for the week.
Until then, do your best to get some R&R this weekend, traders. I’ll see everybody back here on Monday for a look at the new week ahead.