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Gold Weekly: CME Group getting set to launch a new Shanghai Gold Futures contract

Market Analysis /
17 Sep 2019

Asia Gold investors are excited about the CME Group getting set to unveil a new Shanghai Gold Futures contract in October. The Shanghai Gold Exchange, the world's largest physical Gold exchange, will begin new contracts linked to COMEX Gold Futures Asia Spot Price.

The announcement occurs at a time when ASEAN investors are in quest of shelter under Golds umbrella to wait out stormy market conditions due to escalating trade wars. However, it also underscores Asian investors increased presence the Gold markets while suggesting another move from Beijing to promote the “internationalisation” of the Yuan by offering commodity contracts denominated in RMB

Beijing continues to pave the way for a more market-oriented exchange mechanism. This policy shift is something that foreign investors have been waiting on for years as the Peoples Bank of China has controlled the Yuan with an iron fist. However, the tide is shifting as Beijing looks to free up domestic capital markets to foreign investors to help fund President Xi’s ambitious Belt and Road initiative.

However, what is significant for the local trading houses is it will be simpler to manage Forex risk as it would avoid the cumbersome and costly necessity to hedge US dollar positions and could eventually weaken the US dollar dominance in commodity markets.

 

Gold  

Gold is a quirky asset in that it is both a commodity and a macro asset as consumers buy it for its glittering appeal as jewellery, but it acts just like a currency. The “Yellow Metal” correlates to many assets and risk factors, but over time it is most closely tied to the underlying movement of the US dollar and real interest rates. In 2018, the Gold reaction function to the underlying changes of the US dollar was very pronounced, but in 2019 the decline in actual interest rates have been the key driver as the drop in real interest rates make holding Gold cheaper. Hence the reason why Gold traders continue to watch US Treasury yields which can provide much information about the next short-term direction for Gold

 

The correlation between Spot Gold Prices and 10 Year US Treasury Yields

 Gold outlook (September 16-20)


Gold eased below USD1,500/oz as risk appetite grew on the US-China positive trade news flow while yields rose as the European Central Bank failed to match the market's overly dovish rate cut expectations.
 
The immediate focus of the Gold market will shift to the Federal Open Market Committee ( FOMC) meeting next week and its impact on the US dollar. The FOMC meeting will happen on Sept. 17-18.

While a US Federal Reserve interest rate cut could help bolster Gold sentiment, but other factors including the COMEX position overhang and the gradual rise in yields, are negative for bullion while a resilient stock market equally tarnishes Golds glittering attraction.
 
The great Fed divides 
 
There is some support 50 basis point cut on the board. However, because half the members are arguing for no cut at all, that too remains an outside possibility.

Theories aside, the Gold market has priced in a high probability of a 25-basis point cut while anything others might trigger a sizable price movement. However, given the weighty position size on the COMEX, it is supposed that if the FOMC underdelivers on the market dovish expectation Gold could fall lower  

 

The CME FedWatch Tool

Market view

If the confluence of diminishing risks continues, and central banks continue to walk back the markets dovish rate cut expectations, Gold may ease further especially given the hefty long market position on the COMEX which could continue to unwind.

 

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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