Gold Weekly: Volatile Times for Gold

Market Analysis /
Stephen Innes / 29 Oct 2019

FOMC forward guidance will be the key for Gold markets this week

Gold seems to be forming an uptrend as we approach month-end again and a dovish Fed would likely add rocket fuel to this emerging trend. But also worth noting is the last month-end/quarter-end saw an almost 5% drop in the price of gold after a quarter where the metal had rallied by nearly 10%. Flow wise it been agonisingly slow this month but that could quickly change if gold markets can hold above $1510 for a significant duration or break above $1525.

XAUUSD | Gold Chart
XAUUSD | Gold Chart

Source: AxiTrader

US-China trade negotiations continue to inject some uncertainty into financial markets, but Washington and Beijing seem to be coalescing behind a phase one of the trade talks which could be detrimental for gold. Still, analysts remain sceptical about the removal of existing tariffs. And without the withdrawal, a simple tariff detente suggests things might not get worse but doesn't necessarily mean macroeconomic conditions improve either.

Current price action suggests fast money and short-term traders are content to play the Brexit and Trade War headline game of table tennis while strategic buyers sit patiently, biding their time while hoovering up gold on dips.

There is a whole lot of "feel good" priced into the curve as no-deal Brexit and a messy escalation in the US-China trade war tail risks have diminished and are negatively impacting gold demand over the short term. However, whether any of the trade talk negotiations will positively impact forward-looking sentiment gauges, let alone the global growth narrative, is highly questionable, implying that global central banks may continue easing.

Gold currently remains supported above $1500 amid the backdrop of Fed rate cut expectations, but unless increased expectations are cemented post FOMC the going could get especially severe if the USD bounces significantly higher on a less dovish Fed.

The China factor
While the FOMC is in focus this week, it’s hard to ignore the Chinese economy is facing substantial downward pressure which is expected to continue in Q4 2019 and 2020. Third-quarter exports remained weak while imports weakened further and, when stripping out pork prices, CPI inflation is showing deflationary pressure while PPI is already there.
China's economic slowdown and their ongoing deleveraging campaign will create a monster downshift for the global economy but more worrisome for Asia risk sentiment is the economic headwinds will put significant downside pressure on the RMB over the next 6-12 months. As we've seen so often in the past, the stronger USDCNH will act as a wrecking ball across Asia's capital markets.
There's a possible reason why central banks are backing the truck up on gold, and it's not because the Fed is about to cut interest rates or the dollar is expected to weaken. It might be because they think the world is on the verge of an impending recession.


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