Gold continues to trade below its critical technical 100-day and 50-day moving averages, struggling to make any top side progress. The market is in an extended period of consolidation at the bottom of the recent range, waiting for the next major catalyst to emerge. US economic data will likely factor a lot into gold traders’ decision making into year-end, as will the ebb and flow of trade talks. But, ultimately, it's all about Fed policy, US interest rates and the US Dollar, which remain the essential variables as far as the real gold market is concerned.
The gold market has lost a lot of appeal of late as US-China headlines fail to elicit much response from the listed volatility markets and the yellow metal is getting little support from US equity markets, which continue trading with a firm bias.
January implied Treasury volatility traded flat last week despite the HK bill fiasco and the traders "on again, off again" love affair with trade talks. Despite all these worries, fixed income doesn't seem to be able to hold onto its gains. Yes, yields have slinked lower, but last week's reversals only show that, in the current state of play, bond traders would prefer to fade rallies for the time being. This tendency would help explain why stocks aren't suffering, gold remains mired bearishly in a range and why everyone is so relaxed about things.
Gold buyers seem reluctant to commit to fresh longs after the positioning unwinds of the past two weeks. And with the latest China trade talk overtones, courtesy of Vice Premier He, implying China is placing more emphasis on resolving the trade situation, as opposed to the Hong Kong bill, gold continued to sell off into the weekend. If this view comes to fruition, we could expect more selling pressure on gold this week. But in a market still suffering from a case of gold fever, most of the informal polls I’ve reread show that over 50% of investors still think gold will trade higher into week’s end.
Gold continues to track US-Sino trade developments as, in the absence of fresh catalysts, traders are merely reacting to the latest trade headline. And while gold continues to be a critical defensive strategy against escalating US-China trade friction, without a dovish impulse from the Fed or a significant equity market sell-off, price action might be capped in the near term.
But the main takeaway for the US data so far this month is that the FOMC is correct to pause, which is hardly a bullish delight for gold.
With financial markets positioning for year-end, there may be a mild bid for US dollar over the turn, which could also hamper gold top side ambitions in December, all things being equal.
As for the US dollar itself, it's hard to ignore the fact that US equities have started to beat the world indices again, and substantially, which brings the US exceptionalism (QQQ/EEM ratio vs. the DXY) back into play. It may also suggest it’s that time again to look at the bullish USD side of the equation, which could prove to be gold’s eventual undoing in December.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support