Has One Tweet Reversed Gold's 3-Month Downtrend?
Although gold is ending is second week in negative territory, the market is well off its one-year lows as the U.S. dollar bulls reacted to comments from President Donald Trump. Gold’s bounce started Thursday afternoon after Trump said, in an interview with CNBC, that he was “not thrilled” with rising interest rates as they are hurting economic growth.
August gold futures have managed to hold on to its gains heading into the weekend, last trading at $1,229.20 an ounce, down almost 1% from last week.
The President doubled down on his comments Friday morning in a tweet questioning why the U.S. is raising interest rates as debt is growing and coming due. He also called out China and the European Union for manipulating their currencies, taking away the U.S.’s competitive edge.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...— Donald J. Trump (@realDonaldTrump) July 20, 2018
....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?— Donald J. Trump (@realDonaldTrump) July 20, 2018
While gold is testing critical resistance just below $1,236 an ounce, some analysts are questioning whether these comments will reverse gold’s downtrend.
“I think we could see some short-term short squeeze through next week as investors digest all the geopolitical risk in the marketplace,” said Phillip Streible, senior market analyst at RJO Futures. “But I don’t know if this completely saved the gold market. Trump’s comments are not going to stop the Fed from raising interest rates.”
Streible added technical momentum indicators are still bearish for gold and that the downward trend is still fairly strong.
However, for investors who are interested in testing the gold waters at current levels, he likes the idea of buying October $1,250 calls.
Colin Hamilton, managing director of commodity research at BMO Capital Markets, is not paying attention to Trump’s latest comments. In an email comment to Kitco News, he said that the U.S. central bank “seems pretty committed to two more rate hikes this year.”
For gold, Hamilton said that while physical demand is expected to pick up with prices hovering near a one-year low, the market needs a weaker U.S. dollar to attract major asset managers.
Trump Did Not Reveal Anything New
Neil Mellor, senior currency strategist at BNY Mellon, said that he doesn’t see the President’s tweets shifting the strong bullish U.S. dollar sentiment in the marketplace.
“We already know that he doesn’t like a strong U.S. dollar. Nothing he said was new for the market,” he said.
Mellor said that the price action he currently sees is more an indication of investors taking profits, rather than a reversal of futures.
“Gold has seen some major selling this week. At the same time, the U.S. dollar has made some big gains so investors are taking some profits off the table ahead of the week,” he said. “Next week, I think we will see fresh buying in the U.S. dollar.”
Mellor also said that he doesn’t think that Trump’s tweets will stop the U.S. central bank from raising interest rates. He also said that China has no choice but to continue to devalue its currency to support its economy.
“China is trying to deleverage the biggest credit bubble in history,” he said. “A weaker yuan is the only option for the government right now.”
At the same time, Mellor added that European economic growth would support any hawkish comments from Mario Draghi, president of the European Central Bank, next week.
“I think we are going to see some fresh euro selling and that will continue to support the U.S. dollar and hurt gold,” he said.
Gold Is Still The Best Safe-Haven Asset
But not everyone is negative on gold in the near term. Eugen Weinberg, head of commodity research at Commerzbank said that the market reaction to Trump’s central-bank comments is proof that investors should not completely ignore gold.
“We can see how much market reaction there was to just one tweet,” he said. “Investors will start looking at gold again because they will want to focus on security and stability.”
While investors having been swept up in the euphoria of near-record equity valuations, Weinberg said that cracks are starting to show in the global economy and he expects safe-haven demand to grow in the coming months.
George Milling-Stanley, head of gold investments at State Street Global Advisors, said in a recent interview with Kitco News that he expects recession fears to eventually push gold prices higher through the rest of the year.
“I can’t understand why people’s perception of risk seems to have ratcheted down quite significantly in the last few months,” he said. “Circumstances have not improved to the extent to where I would personally want to be taking on more risks. If anything, the circumstances have deteriorated with the continued rise in equities.”
Levels To Watch
Although gold is seeing a healthy jump off its recent one-year low, Weinberg said that more work needs to be before the metal attracts more buying momentum. He said that gold needs to push above $1,250 an ounce before investors feel confident that the current downtrend has finished.
Streible added that he is also watching $1,250 an ounce in the near term.
Chris Beauchamp, market analyst at IG, said that gold prices have to push above $1,265 an ounce before the trend of lower highs is broken.
The Final Say
The economic calendar next week is fairly sparse with little major data to be released. The markets will receive some important housing sales data and preliminary manufacturing data.
The big economic reports come at the end of the week with the release of U.S. durable-goods numbers published Thursday and then the first reading of second quarter U.S. gross domestic product Friday. Economists are expecting that the U.S. economy grew 4% in the second quarter.
In his testimony before Congress this week, Fed Chair Jerome Powell presented a fairly optimistic view on the U.S. economy.
“The FOMC believes that--for now--the best way forward is to keep gradually raising the Federal funds rate,” he said.
With little economic data on tap next week, commodity analysts will also keep an eye on more rhetoric on global trade. According to reports, Trump has said that he is “ready to go” to launch $500 million in tariffs on imported Chinese goods.
“Increasing trade wars raises the risk of slower economic growth so we could see more movement into gold,” said Weinberg.