Gold finds form – can the yellow metal break $2400?
We’ve seen some selling of gold in early Asia trade today, but after a solid 2.8% rally last week the gold bulls really needed follow-through selling in the USD to push the price into $2400 - the surprise second-round French election outcome is certainly curbing interest to buy EURs today and that is limiting moves in the USD.
The tailwinds do suggest pullbacks on the day should be limited to $2365, but with Jay Powell testifying to the House (Tuesday) and US core CPI (Thursday) seen through the week, gold traders do need to navigate some big event risk this week. Tactically, a US core CPI print below 0.2% and we could feasibly see gold above $2400 and making a tilt at the ATHs of $2450. Conversely, a core CPI print above 0.35% m/m (i.e. rounded to 0.4% m/m) and much of the upside seen in gold of late could be pared back.
The primary driver of gold upside has been the buying seen in the US bond market, with US 2yr Treasury yields declining 15bp on the week into 4.60% and smashing through the 4.85% to 4.65% range it held of late since mid-June, with the US10YR real rate falling into 2% also a big factor. Marry these moves in yield with the DXY falling for 7 straight days, and this age-old relationship has become well entrenched, and I expect it to remain so through this week.
US data is consistently coming in soft relative to expectations, and this has been a core factor that has helped push gold towards $2400. However, taking a more medium-term view, the real upside kicker that could see $2500+ would be when the market saw the current central case of a soft landing morph into something more sinister and price a greater probability of recession risk – we’d see that priced by a more aggressive bull steepening of the Treasury yield curve, and US high yield credit breaking down. It’s here that the idea that the Fed would need to take the Fed funds through a neutral setting and into a far more stimulatory stance would put gold as one of the default portfolio hedges – we’re not there, but the market is on notice for the signs that the Fed does make a policy error and keep rates held high for too long.
We can add in the idea that gold may start to get additional love, should we see evidence that the Republicans could surprise current expectations and take the House, which would give them the ability to extend the 2017 Tax Cut and Job Act in 2025, which along with other measures could see the US fiscal deficit increase by a further 1.5t+ - again, a factor which could take time to play out. Also, Freeport McMoran cutting gold production guidance has been a bullish factor, in what is already a tight market.
The tailwinds do suggest pullbacks on the day should be limited to $2365, but with Jay Powell testifying to the House (Tuesday) and US core CPI (Thursday) seen through the week, gold traders do need to navigate some big event risk this week. Tactically, a US core CPI print below 0.2% and we could feasibly see gold above $2400 and making a tilt at the ATHs of $2450. Conversely, a core CPI print above 0.35% m/m (i.e. rounded to 0.4% m/m) and much of the upside seen in gold of late could be pared back.
The primary driver of gold upside has been the buying seen in the US bond market, with US 2yr Treasury yields declining 15bp on the week into 4.60% and smashing through the 4.85% to 4.65% range it held of late since mid-June, with the US10YR real rate falling into 2% also a big factor. Marry these moves in yield with the DXY falling for 7 straight days, and this age-old relationship has become well entrenched, and I expect it to remain so through this week.
US data is consistently coming in soft relative to expectations, and this has been a core factor that has helped push gold towards $2400. However, taking a more medium-term view, the real upside kicker that could see $2500+ would be when the market saw the current central case of a soft landing morph into something more sinister and price a greater probability of recession risk – we’d see that priced by a more aggressive bull steepening of the Treasury yield curve, and US high yield credit breaking down. It’s here that the idea that the Fed would need to take the Fed funds through a neutral setting and into a far more stimulatory stance would put gold as one of the default portfolio hedges – we’re not there, but the market is on notice for the signs that the Fed does make a policy error and keep rates held high for too long.
We can add in the idea that gold may start to get additional love, should we see evidence that the Republicans could surprise current expectations and take the House, which would give them the ability to extend the 2017 Tax Cut and Job Act in 2025, which along with other measures could see the US fiscal deficit increase by a further 1.5t+ - again, a factor which could take time to play out. Also, Freeport McMoran cutting gold production guidance has been a bullish factor, in what is already a tight market.
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