Gold price shows off its resilience, here's what to expect as markets enter holiday mode
(Kitco News) With just 11 days left in 2019, the trading volume is dwindling down and gold is showing resilience in the face of strong risk appetite and rallying equity markets.
On Friday, the S&P 500, the Nasdaq and the Dow were all rising as markets were more optimistic about the U.S.-China phase one trade deal, Brexit and the overall geopolitical outlook for 2020.
Market reaction to U.S. President Donald Trump impeachment news late Wednesday has been muted with analysts saying it bears little significance for investors.
“Global risk appetite remains unfazed by President Donald Trump’s impeachment, as the Republican-controlled U.S. Senate is widely expected to vote against removing him from office,” said FXTM senior research analyst Lukman Otunuga.
On Friday, markets were digesting the latest unrevised U.S. GDP Q3 data and stronger consumer spending. But, the biggest news of the day seemed to be U.S. President Donald Trump tweeting that he “had a very good talk with President Xi of China,” which sent gold prices slightly lower.
“Had a very good talk with President Xi of China concerning our giant Trade Deal. China has already started large scale purchaes of agricultural product & more. Formal signing being arranged. Also talked about North Korea, where we are working with China, & Hong Kong (progress!),” Trump tweeted.
Had a very good talk with President Xi of China concerning our giant Trade Deal. China has already started large scale purchaes of agricultural product & more. Formal signing being arranged. Also talked about North Korea, where we are working with China, & Hong Kong (progress!).— Donald J. Trump (@realDonaldTrump) December 20, 2019
Gold prices were managing to hold the $1,480 level despite the risk-on environment. February gold futures were last trading at $1,480.30, down 0.01% on the day. On a weekly basis, gold was flat, down about 0.07%.
“Gold continues to do well despite a pretty robust risk appetite,” TD Securities head of global strategy Bart Melek told Kitco News on Friday.
The yellow metal’s current strength is in part connected to the Federal Reserve rate expectations going into 2020, Melek pointed out. “It is very unlikely that the Federal Reserve is going to do anything in terms of hiking. And there is still significant risk out there that the central bank lowers rates depending on what the rest of the world does here,” he said.
Melek projects range-bound trading into year-end. “We are likely to stay around current levels between $1,446 and $1,480 … I wouldn’t expect great spectacular things in the 11 days leading up to the end of the year. It looks like gold is holding firm — better than most people would have thought given the amount of risk appetite and the strength of the U.S. dollar.”
Also, a bit of a selloff down to $1,450 is not ruled out, with inverts likely looking to lock in profits as they wrap up 2019, said Mitsubishi analyst Jonathan Butler.
“You could see some year-end squaring going on. Maybe some profit-taking helping take prices back down to $1,450. Equally, some new buying up to $1,500. Generally speaking, as investors look to lock in the profits seen so far this year. We might see some action to the downside in the last few days,” Butler said.
Standard Chartered precious metals analyst Suki Cooper also highlighted that “…tactical investors tend to reduce exposure to gold towards year-end, before re-establishing positions in the new year.”
But, the overall outlook on gold remains positive, Cooper added, noting the precious metal’s strength amid declining geopolitical risks.
“Sentiment towards gold remained constructive, despite the phase-one U.S.-China trade deal; FOMC minutes broadly in line with expectations; and a U.K. election delivering a clear majority for the Conservatives, suggesting that a Brexit deal is likely to be ratified by end-January 2020,” she said.
Thinner volume as we count down to the new year
No major moves are expected as we head into 2020, according to Butler. “We are at $1,480 now. Gold has spent much of this month in a range of $1,450-$1,490. I would be surprised if we saw a major move in either direction as the year comes to end.”
But, with thinner trading volumes, comes the risk of increased volatility, the analyst said. “The trading volumes are down this time a year, which brings opportunities for greater volatility in most cases because you can get orders on either side — buy or sell — moving the market in a more significant way than normal.”
Going forward, the news flow surrounding the U.S.-China trade progress is one of the primary drivers to keep an eye on.
“We shouldn’t be too complacent about the news flow, because it only takes a tweet from the U.S. president, and the markets are moving in either direction. Going into the new year, the key news-flow stories are on the U.S.-China trade talks and any prospects for the stage two of those talks going into next year,” Butler said.
Another remaining uncertainty is how the new trade pact will look like between the U.K. and the EU, added Butler. “On the geopolitical front, things are looking more certain now with respect to Brexit. But, one very big uncertainty is the U.K.’s future relationship with the European Union. That will be a theme of all markets in the new year as U.K. edges closer to some sort of trade deal with the rest of the EU,” he said.
Cooper remains optimistic about gold in the new year, projecting for prices to average $1,536 an ounce in 2020. “Key factors to watch for gold next year will be the second phase of the U.S.-China trade negotiations, the U.S. election, global monetary policy, and the investor response to these developments,” she said.
Data next week
There is not a lot of data scheduled for publication in the U.S. next week. Some of the important releases to keep an eye on include Monday’s U.S. durable goods orders and new homes sales as well as Thursday’s continuing jobless claims.
During the first week of the new year, investors will also get a peek at the FOMC meeting minutes from December, scheduled for release on January 3.
“The durable goods report due next week is likely to show underlying orders subdued in November, consistent with weak equipment investment. In the New Year, we expect the December ISM manufacturing survey to show a modest rebound, while the minutes from the Fed’s December meeting should underline that policy is now on hold,” said Capital Economics senior U.S. economist Andrew Hunter.