For the most part, last week gold traded cautiously, consolidating near the higher end of the recent range amid macro and trade uncertainties until the release of the monthly US jobs report for November. Nonfarm payrolls rose 266,000 vs a consensus 180,000 increase; US job growth increased by the most in 10 months. The reaction in the financial markets was quick and robust.
The yields on the US 10-year Treasury moved up to 1.86%, from 1.79% previously, and the DXY index moved up to 97.84 from 97.38 previously, and the e-minis galloped 30 points higher. All of this weighed on gold but it was the frothy equity market that played the prime role in undercutting gold prices.
The surge in equity markets is the most evident barometer of “risk-on” investor appetite, which throttled potential buyers in gold and prompted selling. In addition, some indications of progress on the trade front between China and the US were also limiting gold upside ambitions before the data.
Expectations were a bit too tepid and the final employment report of the decade was a blowout, suggesting the US economy is in good shape entering 2020.
Gold is likely to stay on the defensive near term.
It appears that employment growth may be holding up a bit more strongly than it previously appeared, which should have the effect of pushing out rate cut expectations further along the US curve, and bearish for gold.
Trade issues have also shifted towards the negative for gold. The US administration said trade talks with China were “moving right along,” according to Reuters. Also, in a positive gesture, China’s ministry of finance said it would waive import tariffs for some soybeans and pork shipments from the United States while President Donald Trump likes where trade talks with China are going. Treasury Secretary Steven Mnuchin said yesterday that deputy negotiators held a call in the last 24 hours and that the negotiations are on track and the United States is not bound by an “artificial” deadline.
The critical inference is the “artificial” deadline which offers up a higher probability that the December 15 tariffs will be deferred.
What does this mean for gold this week?
Trade progress and the blockbuster US jobs data should keep gold trading on the defensive this week.
Chair Powell’s follow up post-FOMC statement may offer some support for gold if he fades the NFP report and reiterates the current FOMC stance that while the bar to cutting rates is high, the bar for hiking is even higher.
Geopolitical issues impact gold. The bullion market may look at fresh election polls early in the week as it could give traders a heads-up if the numbers are trending in a similar direction to 2017. Last-minute sentiment swings could make this one of the most unpredictable events in some time, but it’s also without question one of the most critical events in the UK’s storied history.
Overall, however, the tide seems to be shifting against gold near term, although losses could be limited given the market view that the Feds are unlikely to raise interest rates over the medium term.
But the fall on Friday was steep. A drop below USD1,450/oz may trigger additional selling, but the more critical level may be the November low of USD1,445/oz where large stop-loss orders are thought to lurk.
Trade talk outcome scenarios:
Game plan into 2020
Given uncertain macro conditions heading into 2020, there’s a strong case for investors to hold gold as critical asset allocation. Still, the significant risk in this view is a comprehensive trade deal, better growth and higher rates, which remain the essential factors for a considerable downside squeeze.
But in the current environment where uncertainties remain high and rates are low, especially with equities at all-time highs, many investors now recognise gold’s necessity in the overall climate.
Many bank analysts – not just gold bugs – still expect gold to trade above USD1,600 /oz, supported by the lingering trade war and the economic drag from tariffs that will force the Fed to cut interest rates 2-3 times in 2020 and weaken the dollar. These are all enormous positives for gold.
But the critical risk behind this view would be a comprehensive trade deal with a significant chunk of tariffs rolled back that would stimulate trade flows and economic growth, causing the Fed to raise rates and strengthen the dollar. In this case, it wouldn’t make sense to own gold as the economic outlook would be much brighter and the cost of owning haven assets like gold become much higher.
Ultimately when it comes to glittering gold appeal, it’s all about the opportunity cost of risk-free asset returns as measured by the real 10y Treasury yield. So, Fed policy will hold the cards and be the critical catalysts for where gold trades in 2020.
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Two-year yields have covered their prior six-month range in the last week alone – and whether or not this move is sustainable matters a lot