Mr. Gold's Wild Ride
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Featuring views and opinions written by market professionals, not staff journalists.
Immediately after making a six-year monthly high close this week on the Comex, gold sector traders began to “sell the news” of the highly anticipated and mostly expected Fed rate cut decision on Wednesday afternoon. Once the 25bps rate cut was announced, computer algorithm-based trades began to react to the words of Fed chair Jerome Powell’s speech and the action became volatile.
However, once the head of the world’s largest central bank uttered the phrase “we might raise rates when things calm down” during the press conference following the speech, gold’s slide intensified. Although Powell immediately began to walk back this statement, the damage had already been done by the algo’s and the GDX was hit hard with huge volume.
At the end of the Jerome Powell press conference, MarketWatch reporter Jeffery Bartash posted on the Fed Watch Live Blog; “The most contentious press conference for Powell yet. He got irritated and impatient a few times, which doesn't happen often. And he challenged reporters more. There was a LOT of skepticism in the room.”
The selling in gold continued overseas late Wednesday and tested the psychologically important $1400 region. Once trading began in the U.S. on Thursday, the GDX tested support at $26 only to find willing buyers who have been patiently waiting for a correction that eventually reversed all of the previous session’s losses with huge volume.
Gold also reversed strongly and bond yields continued to plunge when President Trump announced he was going to slap an additional 10% tariff on Chinese imports into the U.S. in late trade yesterday. Recently, President Trump said that “We will be taxing the hell out of China” during a rally in Cincinnati.
Adding to the fears was another North Korea missile test, third in a week’s time, that is likely to weigh on the US-North Korea trade relations while the U.S. awaits details of future nuclear talks from leader Kim Jong-Un.
The Federal Reserve’s rate cut helped swell the total of all debt with sub-zero yields to more than $14 trillion. As mentioned in this column last week, the gold price continues to mostly ignore the strong U.S dollar with investors losing confidence in all central banks and their currencies.
In fact, the world’s reserve currency made a two-year high after the 25pbs announcement was made by the Fed, while gold was being sold by the algo’s. Nevertheless, the safe-haven metal quickly reversed all of its Fed-speak losses and the December gold futures traded briefly above $1450 per ounce in after-hours trade the following session.
The gold complex has another wind at its back now with the stock market beginning to sell off hard on increasing volume. The Trump tariff announcement pressured the U.S. dollar index some more as well, prompting the U.S. stock market to lose all of its daily gains and then drop solidly lower.
Moreover, The World Gold Council (WGC) announced yesterday that gold demand was 1,123t in Q2, up 8% y-o-y. H1 demand jumped to a three-year high of 2,181.7t, largely due to record-breaking central bank purchases. Central bank buying and healthy ETF inflows were the driving forces behind gold demand throughout the first half of 2019.
I expect gold’s wild ride to continue into the weekend, with the results of the July Non-Farms Payroll (NFP) report being the most important monthly report for the U.S. economy, given the heightened expectations for future cuts. The U.S. generated a steady 164,000 new jobs in July, slightly below the forecasted 171,000. The government revised the increase in new jobs in June down to 193,000 from 224,000. May's gain was cut to 62,000 from 72,000. According to the CME FedWatch Tool, just after the NFP was released this morning, the odds of a follow up cut in September are now 89%.
Once gold quickly tested the $1400 region, the metal has reversed into to the consolidation area and may now be headed towards the technical target of $1550 before this move is over. The quick return of buyers is typical action in strong gold up-legs, as corrections are short and sharp with the new bull attempting to buck off as many riders as possible.
Lower interest rates and resurgent investor and central bank buying are expected to help gold prices cement recent gains and hold above $1400 an ounce. With gold continuing to build a solid floor at this level, I expect the GDX to eventually break out of its recent consolidation and challenge the mid-2016 highs near $31.
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