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.
After a mostly mild run of trading with only one truly active market day for gold after the strong Monday performance to open the week, gold prices are trading solidly higher as trading rolls to a close on Monday.
The yellow metal endured some choppy seas midweek and has been rewarded with an opportunity to consolidate gains before possibly pushing towards the major mark of $1900 in the coming weeks.
So, what kind of week has it been?
It’s an unusually quiet week for gold markets that we’re looking back on; One that packed what activity it had into Wednesday’s trading session while the days before and since have been mostly uneventful. Ultimately, the main takeaway from this week will be another phase of consolidation and steady upward movement for gold prices; The yellow metal weathered the midweek volatility on its own price chart alongside other correlated assets, and is set to close the week with solid gains near to a spot price of $1880/oz.
- A dominant tailwind for gold’s rise this week has been the steady slide of the US Dollar against its main basket of trading partners. This was a dynamic that we expected at the beginning of the year, assuming that the Fed’s commitment to ultra-low interest rate policy would create persistent drag on the Greenback.
- Momentum broke the other way—pushing the Dollar higher so that, at one point, DXY had erased it’s January-February losses—at the start of spring 2021 as investors’ concern about higher inflation projections drove (mostly unwarranted) speculation that the FOMC might move to taper its asset purchases ahead of raising rates earlier than expected.
- Since the end of April, however, the consistent messaging from Fed officials that the current spike in price inflation is expected to be transitory has worn down investors’ level of concern and worn out the more dire inflation hawks. As a result, as Treasury yields have fallen so has the US Dollar Index. After trading lower for another week, DXY is threatening to break below its cyclical low from early 2018,, an important psychological level.
- We can see that not just gold, but the overall commodities complex has been one of if not the primary beneficiary of the Dollar’s springtime skid, whereas similar runs of Dollar weakness in 2020 mainly boosted equities.
In the period charted above, the Dollar index has fallen by more than 2% while the S&P 500 (thanks to losses up to and including this week) has been essentially flat.
The wild day of Wednesday’s US trading session began with gold appearing to get pulled into the churn happening around a wild rush of destabilizing volatility in the cryptocurrency class, which was influencing swings in the yellow metal (as a more “traditional” safe haven) by way of having a more direct impact on the US Dollar market.
- Gold prices initially fell as low as $1855/oz during London trading hours, before the start of US trading reversed course and the first hours of cash trading saw spot priced for gold driven sharply higher to a weekly high just shy of $1890.
Once the adrenaline of the morning wore off, gold prices experienced a reasonable correction after failing to break above resistance at $1890 on the way to $1900. Prices were still trying to consolidate respectable gains for the session when the midday release of FOMC minutes roiled markets again. The immediate impact of the markets’ reaction sent gold prices tumbling lower alongside US equities.
- The catalyst for Wednesday afternoon’s market swings was the revelation that, at April’s FOMC meeting, “a number” of Fed officials voiced their opinions that, if US economic data and performance continued to strengthen as it had been since the start of the year, then “it might be appropriate at some point in upcoming meetings to begin discussing a plan” for tapering the current pace of asset purchases as a policy aimed at easing monetary conditions.
- This is the first concrete turn that we’ve been allowed to see from Jerome Powell and the Fed’s consistent line that it’s not yet time to even start “talking about talking about” tapering. The implication, of course, is that the Fed’s timetable for policy adjustments leading to rate hikes could be moving up after all.
- In response, Treasury yields spiked higher as sovereign bonds were sold aggressively. All three key US equity indexes plummeted and gold prices fell back below $1865/oz.
The initial market reaction was a kneejerk—a reaction to the text with no consideration for context—and an unsustainable one. While the revelation that, a few weeks ago, strong US economic data and signals of recovery had some FOMC members almost ready to plan for the start of discussions around policy adjustments is objectively important to accurately projecting the Fed’s policy path, by the time these discussion notes were released on Wednesday they were already stale.
- It has been in the weeks since the FOMC meeting that these minutes illuminate that we’ve seen a faltering economic data in the US and, most importantly, a brutally disappointing jobs report for April.
- The sharp slowdown in the labor market recovery alone was probably enough to invalidate any interest that FOMC participants had in opening taper talks.
We can see on the charts where reality took a stronger grip on markets. By the end of US trading on Wednesday gold had arrested its’ slide, and US equities pared back the majority of losses to close just barely in the red.
- Gold was a bit choppy during the following overseas sessions, but Thursday was ultimately a day of gains for the yellow metal; Likewise, the US stock market snapped a three-day skid to go green on the board.
- While the yellow metal again failed to break resistance at the peak price of the week on Friday morning, it is closing the week in strong consolidation and it appears that the base for next week will be at $1880/oz or higher. Equities are also performing well to end the week as US Treasury yields have continued to pullback from Wednesday’s spike.
Looking ahead to next week, it’s another sparse economic data calendar. But we can expect a number of public comments from Fed officials through which traders and investors should be able to clarify (to some extent) how the recent weeks’ economic readings have impacted the FOMC’s impressions since the end of April. We’ll also get an update on the Fed’s direct measurements of inflation, due out on Friday.
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.