Happy Friday, traders! Welcome back for our recap of the week in the metals markets. At time of writing, gold prices are trading steadily in the $1415-20 range ahead of one of the most anticipated FOMC meetings in over a year.
So, what kind of week has it been?
Markets Were Slow to Start the Week
The market to start the week, Monday through Tuesday, wasn’t quite calm, sideways trading but it certainly lacked the frenetic pace that we’ve often seen during gold’s (and now silver’s) bull run over the last several weeks. Having made a respectable foothold last week closer to $1425/oz than $1400, some price consolidation was certainly in order as the yellow metals and its correlated assets took a breather.
With the light calendar and slow news day (as we mentioned on Monday, the world inside and outside of markets seemed largely unconcerned with resolving Iran’s aggressive actions over the weekend in the Strait of Hormuz,) gold trading was flat through most of Monday until mid-afternoon when the White House and congress confirmed reports that a new budget deal had been reached. This avoids another showdown over the federal debt ceiling and eliminates any risk of the US defaulting on debt in the fall, and the news of the agreement immediately lifted the Greenback against all comers; in response, gold prices fell below $1420 where they would languish throughout Tuesday trading in Asian and Europe.
The IMF Separated US Economy from the Pack
Opportunistic buyers stepped into the gold charts on Tuesday morning as New York traders came online, and for much of the morning we saw strength in the yellow metal’s price-action, but a pair of significant US Dollar-positive headlines created a headwind for gold that proved too strong to overcome. First, the IMF released its updated projections for global growth in 2019: while cutting the estimate of global growth the report actually raised its call for US economic growth.
I think this dynamic will be important to watch over the next six months (at least.) If, as expected, the developed world’s central banks all resume (or in the case of Japan, continue) easier monetary policy, markets will be looking for differential forces between the currencies elsewhere; if everyone is easing but the US is the only economy holding on to healthy growth (for a time,) that will be strongly supportive of the Greenback relative to its primary crosses. The effect for gold markets would be a limiter on gold’s upside even as the Fed possibly continues to cut rates.
US and China Announced Face-to-Face Talks
Getting back to Tuesday gone, the second Dollar-positive impulse came from news that amid indications that both sides are starting to make minor concessions to one another, senior members of the US and China trade delegations will sit for face-to-face meetings in Shanghai next week. In the past we’ve touched on how steps toward an end (or at least a de-escalation) to the trade conflict brings some crosswinds into gold price action because the promise of a healthier Chinese economy over the horizon brings with it increased demand for precious metals; but until progress becomes more concrete these headlines will likely be primarily bullish for the Dollar and hold gold price-action down a bit. To that point, gold spot prices would finish Tuesday’s session below $1420 once again. However, in an encouraging sign of chart consolidation, the open of Asian markets for Wednesday would bring buyers back in and see the yellow metal once again rise towards $1425/oz.
Boris Johnson Elected Prime Minister of Brexit
Tuesday also brought us, finally, confirmation of Boris Johnson as the next Prime Minister of Great Britain. There’s not much to say about this development at the moment if you’re not funding your trades in Sterling (which has some elevated downside risk in the near-term,) because it’s difficult to say what, if anything, has changed about the UK’s state of play. As BoJo fills out his cabinet hopefully next week we’ll get something to trade on.
The Gold Market Took a Breather Mid-Week
Wednesday continued the calm start to the week. With a boost from safe-have positioning brought on by yet another rash of negative growth data in the heart of the European Union—particularly German manufacturing PMI this time—gold spot charts reached back above $1425/oz. Still, with seemingly a lot of European traders sitting on their hands Wednesday, the bulls could never really get the momentum going to sustain gold’s uptrend or hold on to gains and so the yellow metal floundered again, and the rest of the trading day was unremarkable. New Home Sales in the US implied some weakness, as did the Markit group’s variant of US PMI data.
Gold Hit Weekly Highs as ECB Raises Concerns and Readies for QE…
Market action finally felt reanimated on Thursday morning; what was at first a ripping start to the early US session turned into a mild downer for gold prices. As broadly expected, the ECB’s post-meeting statement and press conference represented a further dovish shift and another step towards not only interest rate cuts in September, but likely the start of a new round of QE as well. Gold prices, having climbed steadily in anticipation during the European morning, embraced the news by quickly moving higher, past $1430/oz.
…but Strong US Economic Data Muddles FOMC Predictions
The bullish spark was put out within the hour, though. At 8:30am EDT Durable Goods Orders for June were reported to have risen by 2.0%, more than twice the expected increase and the first positive movement in 3 months. At the same time, Initial Jobless Claims came in at a three month low just above the 200k line. In response gold prices collapsed under sudden downward pressure, falling back through $1425/oz within a half hour and breaking below support at $1420 by lunchtime. The yellow metal would close the day on its back foot, skulking around $1415 for the rest of the session.
In recent weeks I’ve reiterated my belief that, at $1400-10/oz, the presumptive 0.25% cut to short-term rates that the Fed will deliver next week is fully priced into gold as well as other assets; also, that for gold prices to trade meaningfully, sustainably higher the market demands reliable odds of more drastic easing—whether that’s a larger cut next week or plans for subsequent cuts later this year. To my mind, that’s an idea further supported by gold’s price-action on Thursday morning around the ECB and then strong US macro data: while the ECB appearing to start its own move toward the lower bound certainly reduces resistance to the Fed doing the same this year, Thursday’s strong US data (coupled with similarly positive number last week) for now makes a stronger argument for a next week bringing a one-time, 25-basis point “insurance” cut; through this lens, $1415 (or so) for and ounce of gold seems like a reasonable end to the week we’ve had.
Stronger US Growth in Q2 Sets the Table for Fed Week
This morning’s first release of GDP growth in the US for Q2 topped estimates, coming in at +2.1%. While the numbers aren’t earth-shattering, the US Dollar index has reached its highest level all year and it certainly looks like another point for Fed’s policy hawks who will argue that an economy won’t need more than a single rate cut for the time being. Gold prices dipped accordingly, falling briefly back to $1415/oz—the yellow metal had traded at $1420 prior to the US data release, lifted by some safe-haven positioning in the European sessions on pessimistic Brexit headlines.
That level, for now, looks to be solid support on the gold chart as buyers quickly stepped back into positions. The rebound rally that followed had some confidence to it but has moderated somewhat as the short-term profit traders who missed Thursday’s selling took advantage of the lift in price. Gold spot prices look set to wrap up the week at a lost with the close in the $1417-20, but the uptrend going on two-months still remains intact. The early trading next week will probably be fairly light as the market gears up for Wednesday’s FOMC meeting, the main event of the summer.
It’s pretty hard to look past the FOMC meeting next week. Yes, we assume there will be an interest rate cut, but as that appears fully priced into the market what becomes more relevant is the commentary in the Fed’s statement and Chairman Jerome Powell’s press conference as the market will try to re-set the table for the next step in the rate path. There may be no rest for the weary trader of course, as just two days later we’ll have the latest US Jobs Report to reckon with.
So, traders, it sounds like we should all get some rest while we can! Enjoy the weekend, and I’ll see you back here on Monday for a closer looks at the week ahead.