Happy Friday, traders. Welcome to our weekly recap of the metals markets, are you still with us?
Gold prices this afternoon are trading just above $1440/oz and do look to be drifting lower heading into the close of what has been quite a week.
So, what kind of week has it been?
Gold Prices Bid Slightly Higher Ahead of a Vital Fed Meeting
If I’m being honest, now that we’re on the other side of Wednesday’s FOMC trading and the banana peel that the White House tossed in front of markets on Thursday afternoon, it’s a little tough to gin up the energy to review Monday afternoon and Tuesday’s trading sessions which were mostly dull on their own merits and even more so compared to the action we’ve experienced in the days since.
Still, as your ever-faithful recapper, I’ll at least hit the highlights. Currency and metals traders were clearly in a mostly hands-off stance to start the week, but there were some upward pressures on gold prices in such a tepid environment. Buyers stepped in Monday afternoon and bid gold’s spot value up to $1428 before the day’s end, I suspected at the time that this buying—and the effort that would follow on Tuesday afternoon to push gold prices past $1430—was a mix of speculators: some adding long gold positions in case the Fed came in dovish and drove gold prices higher, and some just trying to goose prices for one more run before the chart collapsed following at down-the-middle 0.25% cut. At the time I believed it was an even mix but given how bitterly disappointed longs in other assets were at what they saw as the FOMC not being easy enough I know think the Monday/Tuesday buying was much heavier-weighted to the former.
Regardless of the tailwind, once prices made their way to $1428, they would hang up there until Wednesday afternoon’s FOMC statement hit the wires. As much as I disagreed with a valuation that rich ahead of the Fed, there were some legitimate macro inputs supporting gold buying. The Bank of Japan left monetary policy easy on Monday night—no shock there—and shifted their statement to a more dovish footing while elsewhere in Asia the US and China’s trade delegations met face-to-face again finally, but the preceding optimism from last week pretty quickly deteriorated into very low expectations (not low enough, I think, to have seen Thursday afternoon coming.)
Also, from the start of the week it’s become clear that Brexit has once again become an increasingly worse problem for British investors as newly minted PM Boris Johnson disappointed markets that had hoped he would back away from the hardline Brexit stance he had to adopt to win his party’s election. So far, Johnson and his new cabinet have gone out of their way to embrace the possibility of a no-deal Brexit on October 31. The Pound ended July 4% weaker, and I expect to see increased risk-off positioning by GBP-denominated investors, supportive of gold prices for now.
Gold Prices Fell as the FOMC Delivered a Cut Alongside Hawkish Messaging
On Wednesday, before FOMC Wednesday got started, gold moved as high at $1430 again in the European session partly as a result of more dour economic data from Europe: 2Q GDP for the EuroArea looks to have declined 50% from the first quarter. As the sun came up stateside, Wednesday’s morning data was pretty vanilla, with ADP Employment numbers presaging Friday's NFP data by printing almost exactly as expected (156k vs. 150k exp.) as did quarterly wage inflation. The one hiccup was the Chicago (combined) PMI survey; expectations were for an uptick that would pull the metric out of June’s marginally contractionary level, but it instead dipped further. Typically that would be a buy signal for risk-off assets like gold, but ahead of the FOMC and with the US Dollar gaining ground the mood at the cash open was for taking profits and selling gold as the yellow metal fell to support at $1425 for the first time all week.
The FOMC took the stage at 2pm EDT and delivered what, relative to the expectations of an over-eager market, looks to be the most hawkish rate cut in modern memory. You can read our recap of Fed Day here, and some of my thoughts about the Fed’s next step here. Gold prices collapsed during Chairman Powell’s press conference and after, until finding support above $1405 during the European session.
Gold Ripped Back to the Top as the White House Reignited the Trade War
If you had gone on vacation this week and today, on returning to the desk, checked the gold price before reading the news, you could be forgiven for thinking that this had in fact been a very dovish week for the Fed.
If only it were that reasonable.
Gold’s rally off of the floor that started in the early hours of New York trading was surprisingly strong. Thursday’s data was pretty down-the-middle: initial jobless claims for the week kept the trend just above a manageable 200k, and while the ISM Manufacturing PMI was a slight miss, at least it still remained in expansion territory. On the charts, the gold rebound had taken spot prices to just below $1420—maybe a bit rich, influenced by a mix of traders with short-term short-gold positions on having taken their profits and other investors looking to buy into a coming gold rally; all pretty standard stuff immediately post-FOMC move.
It looked like the rebound-rally was starting to find the top of its range when, just after lunchtime in New York, the President announced his plan to levy a 10% tariff on a new tranche of Chinese goods as of September 1. There is, I think, a lot to unpack about this announcement—not least of which is the timing of it which is curious on many levels—but as we’re just recapping the metals week here I’m going to stick with the facts.
The facts are: Jerome Powell and the Fed signaled on Wednesday that they aren’t committed to further lowering of interest rates unless the economic situation deteriorates enough to warrant such action; just before that, the committee laid out the “simmering” trade conflict between the US and China as a driver of the uncertainty that warranted a July cut and could “boil over”; with Thursday afternoon’s tariff tweets the President went ahead and just kicked the whole pot over. Gold prices ripped to $1440/oz (they would reach $1445 by the close) as equity markets panicked.
The risk-off roiling carried into foreign equities overnight even as gold drifted lower, and by the time the July Jobs Report dropped this morning it was almost entirely overshadowed. The numbers were as close to target as they have been in several months with a respectable 164k jobs added and 3.7% headline unemployment (still.) Those are numbers that would argue against further policy easing, and gold prices did sell-off accordingly. But when the equities markets re-opened at 9:30am EDT it was clear that Trump’s tariffs were still dominating the economic narrative and gold surged back to $1445 as stocks resumed their slide.
Next week’s economic calendar would look sparse even if it weren’t in relation to the week we’re coming out of. Still, FedSpeak will be far and away the most important macro points next week—the ones we’ll be able to schedule for anyway, we will of course have to monitor just how quickly the US-China trade relationship is falling apart and Thursday was a master class in how spur-of-the-moment that game is now.
Get some rest this weekend, traders. The good news is that we’ve all survived a wild week in the metals and currency markets; the great news is that we get to do it again on Monday. I’ll see you there.