Sideways trading as gold futures hang above $1,500 – the quiet before the storm?

Start trading
Updated: 12 December 2019
  • Gold futures continue to hang in there at higher levels. Expected pull back hasn’t yet materialised.
  • The price is partly supported by recessionary fears seeping into the wider community
  • Bond yield inversion in US Treasuries taken as a sign of recession or rate cuts – or both
  • US Fed meets in Jackson Hole to consider its options – notes to be released Friday
  • Further geo-political risk introduced by G7 summit in Biarritz – airport closed until Sunday
  • The quiet before the storm

Gold futures contracts (GLC1!) continue to trade above the psychologically important $1,500 level.

A large number of analysts had expected the recent price surge to bring about profit taking and even the taking of short positions. Although the price has touched the $1,500 level, it still hovers above it and hasn’t yet made a concerted effort to test or pass through the level that now marks considerable support. Even fans of gold, those targeting prices of $2,000 and higher, are surprised that the $1,500 level has held.

Source: Kitco News

 

Speaking back in July, when gold was trading closer to the $1,400 level, Gerald Celente, publisher of The Trends Journal said:

“The next breakout point had to be $1,450. I believe when it breaks beyond that, it’s going to spike for the $2,000 mark.”

Source: Kitco News

Celente identified relaxed monetary policies around the world as the catalysts for this new rally.

Hanging in there – Gold Futures (GLC1!) – Five day price chart:

Source: TradingView

 

Wider demand

The price of defensive assets really takes off when a wider section of the general population reacts to contagious fear and buys gold or bitcoin, or whatever satisfies their concerns, on the grounds of risk management.

Gold industry site Kitco has run an analysis of recent internet searches and shares some interesting findings:

“Over the past year Google Trends shows that finance-related searches for ‘gold’ doubled in the month of August.”

Source: Kitco

The site refers to the below chart, which is drawn from Google Trends:

Source: Kitco

Whisper it, but the site also analysed the number of searches relating to ‘recession’ and revealed some quite alarming data. Searches on this subject are up about eight-fold.

Source: Kitco

The increase in the number of searches, which involve ‘gold’ and ‘recession’, reflects the rising concern among a broader group of investors. Those looking for reassurance would do well to avoid the financial press. Headlines and analysis are being drawn to a range of geo-political events, all of which keep shape shifting. The US-China trade war has overshadowed the financial markets for several months. It’s still a long way from resolution, which means claims of such things as currency manipulation can wipe billions of dollars of value off the financial markets. The headlines today suggest even before that spat is resolved it might be downgraded to a mere side-show. Considering the possibility of a US-Europe trade war CNBC reported, Thursday:

“A trade war with Europe would be larger and more damaging than Washington’s dispute with China.”

Source: CNBC

 

Jackson Hole Symposium

The US Federal Reserve is this week meeting to consider the economic situation and its approach to it. Friday morning will be the first time the Fed will share some of its findings with the investment community. The Fed’s data-led approach will note that this week’s reports are generally positive. For example, oil prices found strength on Thursday when Brent crude (Ticker: LCOc1) and US West Texas Intermediate crude (Ticker: CLc1) both rose half a dollar in price.

No-one is banking on the Fed being able to maintain its quant-style approach. Political interventions, particularly by the White House are a factor that is clouding the situation.

Gold – GLC1! – One month price chart

Source: TradingView

The last major information release from the US Fed was the minutes of the July FOMC meeting, which indicated there was no high-level strategy being followed and that instead “it was important to maintain optionality in setting policy” (Source: MarketWatch). Gold futures may well be holding in there at prices above $1,500 because there appears little downside risk.

If – and it’s a big ‘if’ – the current price reflects current Fed policy, then the only real direction of movement would be further loosening and more cuts in interest rates. Any move towards a hawkish monetary policy would likely be one of the greatest shocks the markets have known. This thought is confirmed by the CME Fed Tracker. The CME’s gauge of future rate levels shows the market is pricing in a 98% likelihood of a 25 basis point cut when the Fed meets in mid-September.

CME – Fed Tracker – 22nd August 2019:

Source: CME Group

On the other hand, gold currently appears unable to push on to higher levels. Price strength at this stage of its bull-run is quickly matched by profit taking. Ilya Spivak, senior currency strategist with DailyFX holds the view that the current price of $1,500 actually factors in at least one US interest rate cut:

“The appeal of the non-yielding metal is likely to be diminished if Mr Powell and company appear unwilling to commit to big-splash rate reductions.”

Source: DailyFX

Spivak added that there was immediate technical support for spot gold at $1,480.00 but a daily close below that level could open the way to $1,437.70–$1,452.95. (Source: DailyFX)

 

G7

Something to add to the mix is that this weekend sees the French nation host the latest G7 summit in the coastal town of Biarritz. The decision to host the event at a smaller setting will make it easier for security forces to stem public protestors. The coastal town, which has a base population of 25,000, has in the last two weeks seen its ranks swelled by an additional 13,200 law enforcement personnel. The local airport is closed until Sunday and the five railway stations in the area are also temporarily closed. Locals with the inclination to navigate the many roadblocks and walk to the town centre will have to remember their security passes or face being turned back.

Source: The Spectator

Even so, a range of different protest groups look set to make their presence known. The event is gaining the attention of groups ranging from Basque separatists to the Gilet-Jaunes. By the time Biarritz airport re-opens, we might have an indication on the immediate direction of gold. Given the number of variables, there appears to be a limited chance of second-guessing the news that is due to be shared between now and Sunday.