Happy Friday, traders.
So, what kind of week has it been?
Certainly, a more active week in gold than we anticipated on Monday. As the majority of meaningful U.S. economic data, the contentious midterm elections, and the FOMC meeting and rate decision all landed just as the markets had priced-in, I think we all would have anticipated the yellow metal to trade a tight range if we had those results ahead of time. Even the out-sized spike in PPI reported this morning isn’t the kind of data typically associated with swings in the dollar or gold prices. Oil prices (both Brent and WTI,) the only component with a larger impact on the Bloomberg Commodity Index than gold, changed things.
Let’s talk about it.
As of this morning, oil prices are down for the tenth consecutive day, continuing what has been a five-week slide. Brent crude has fallen below the $70/barrel it had held going back to April of this year, while WTI barrels are selling for less than $60. The 20 percent decline from October’s tops means that oil has officially turned over into a bear market—a headline that has only driven more weakness in oil today.
Why are we talking about black crude on a gold metal website? Because a sell-off of this kind in energy prices often passes-through to serious weakness in gold due to both assets being so heavily weighted in the BBG Commodity Index.
And so, with gold spot trading around the bottom of the range we anticipated for this week, when WTI and Brent prices pushed below technical and psychological resistance levels ($60 and $70, respectively) in European trading gold followed suit, first breaking below resistance at $1220/oz before the trough deepened early in the New York session to test $1210.
At time of writing, gold has remained pinned around the low going back to Halloween but other markets are already starting to correct: WTI and Brent are both recovering (if tentatively) in late morning trading, the US Dollar is only continuing it’s slightly-higher-to-flat trajectory, and the collapse in crude prices look to be weighing US equities down for their worst day of November. These inputs all set the table for a recovery in gold prices, particularly if resistance holds at $1210/oz through the afternoon, which is expected to be quiet. Going in to next week, we’ll keep an closer-than-usual eye on weekly EIA energy data.
With the big story out of the way, lets take a look back at a few other points we had our eye on this week, and what contributed to gold trading near its range-lows ahead of the drop in overall commodities.
The conclusion of the 2018 election cycle—which seems like it lasted for a century—arrived largely as we and the market anticipated, resulting in a Dem-controlled House and a split congress. Elections going as expected in the US always provides at least some boost to the US Dollar, and this likely contributed to some gold-selling on Wednesday as the fear component was reduced and markets overall felt a little more risk-on (more than we anticipated, it should be said.)
That said, one of the medium-term effects of this election is expected to be a noticeably more contentious and less productive relationship between the legislative and executive branches which is definitely a bearish signal for the US Dollar and could be a driver of continued gold strength after this week’s compression.
Thursday’s Fed meeting was another headline event that landed as expected (no change to the key interest rate) and with little flash, but also contributed to some gold weakens. The table is now properly set for the next rate hike to arrive in December; a nearly guaranteed rate hike was essentially priced into gold, rate, and currency markets but we also saw some mild gold selling after the announcement as expected.
One extra note: this week was the final FOMC meeting that will arrive without a press conference to follow the committee’s statement.
We didn't list wholesale inflation as a key data point to watch this week but it’s worth noting an economic release that out-performs at a six-year high, especially in what we presume to be the later-part of this economic cycle.
Here are a few of the points we’ll be previewing for next week:
- Wednesday brings us a look at US inflation and a second-read of Q3 GDP for the EuroArea.
- Thursday has US retail numbers, and after today’s trading we’ll be keeping an eye on the EIA report of crude inventories.
- Friday will be a light day, but we’ll be paying attention to US industrial production data.
Enjoy your weekend; we’ll see you back here Monday with a detailed preview for the week.