• Joel

Gold Slammed Amid Risk on Markets

Gold took a beating today, slipping below the psychological $1700 level for just the second time since early May, taking losses on the week to north of $50. 

Fundamentally speaking, pretty much everything seems to have worked against gold today (and this week in general). 

1) Risk on

As I have repeatedly discussed in the morning rundowns this week with the paying members, markets have been in a strong risk on mood this week, despite growing civil unrest in the USA and the underlying threat of US/China trade tensions. Why?

  • Covid-19 infection and death rates continue to fall in major markets (US, UK, EU, etc.), despite economic reopenings continuing, reducing fears of a “second wave” as each day goes by. Meanwhile, expectations seem to be that we will have a vaccine in mass production by year-end. 

  • - No news is good news on the US/China trade front; maybe by not hitting out at the US/China Phase One deal last Friday, US President Trump has diffused tensions with China over Hong Kong. 

  • Improving EU fiscal unity raises the prospects that the EU will be a net contributor to global economic growth acceleration during the post-Covid-19 recovery, rather than a drag (as it had been over the past 2 years). 

  • The ECB is likely to increase the size of the PEPP (its Covid-19 QE programme) by a large amount on Thursday. 

  • USD continues to be hit, with the Fed as pretty much the most dovish central bank in the world when it comes to balance sheet expansion (money printing to buy assets/lend). A weaker USD is better for all global risk assets as it is better for global growth prospects.

Risk assets have absolutely surged this week, with the DAX over 7% higher. This is not a good environment for demand for safe havens such as gold (in the short-term anyway). 

2) Strong US and European data

Turning to events that more specifically took place today; 

European final May PMI and unemployment data for May came out much better than expected this morning - things are obviously a little better than anticipated in the Eurozone at the moment. 

US data was similarly positive; ISM Non-Manufacturing data was better than expected, and ADP national employment data was a HUGE beat on expectations (it showed “only” 2.76mln Americans lost their jobs in May, compared to expectations for 9mln). 

This day of good data appears to have given risk appetite a sizeable boost today, at the expense of gold of course. 

3) BoC scales back repo operations

Though this move was expected, given calmer Canadian financial market conditions, gold doesn't like it when you scale back on central bank easing measures. Will other central banks be following in the BoC’s less dovish path soon?


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