Wall Street Dumps Gold, but Main Street Refuses to Let Go

Gold prices marked another less-than-scintillating string of trading sessions this week, punctuated by a series of moderate highs and lows on both sides of the $2,500 level to ultimately arrive not far from where they began. 

Spot gold kicked off the week trading at $2,504.37, before dipping down to $2,490 per ounce during the Asian trading session, and grinding higher to $2,506 through the European and thinly-traded North American session, with most traders observing the Labor Day holiday. 

Tuesday saw the return of the full contingent of market participants, and it also brought the week's first real downward volatility, as the North American open drove spot gold to its then-weekly low of $2,477 per ounce by 10:15 am Eastern. Gold prices quickly recovered to trade right on the edge of the $2,500 level, before European and Asian traders once again drove the yellow metal to a fresh weekly low of $2,473 per ounce just before 5:00 am EDT. Spot gold bounced all the way back to $2,486 by the North American open on Wednesday, with traders pushing the price action back just below $2,500 by 10:30 am. 

From there, gold prices embarked on their steadiest climb of the week, topping out at $2,522 per ounce just before the release of weekly jobless claims on Thursday morning. After another brief retest of support close to $2,500 three hours later, gold maintained its highest sustained price plateau before peaking at the weekly high of $2,525 per ounce just before the release of Friday's non-farm payrolls report at 8:30 am Eastern.

The employment data was mixed, and for a few minutes, so was the market reaction, but traders ultimately settled on a negative interpretation and drove gold prices to a daily low of $2,487 per ounce shortly after 12:30 pm.

Spot gold then staged a modest recovery, and hovered $5 below the $2,500 level for the remainder of Friday's trading session.

 

The latest Kitco News Weekly Gold Survey showed industry experts pessimistic about gold’s near-term prospects, while retail investors’ positive sentiment was virtually unchanged from the prior week.

“Down,” said Darin Newsom, Senior Market Analyst at Barchart.com. “I know I went sideways last week, and Dec gold traded either side of unchanged this week. Looking ahead, with the US FOMC meeting another week down the road, Dec gold looks to be in position to move quietly lower next week.”

“The short-term trend on the contract’s daily close-only chart is still down, with support at the recent low of $2,523,” he added.

Phillip Streible, Head of Market Strategy at Blue Line Futures, is bearish on the yellow metal as $2,550 caps rallies in the near term. However, he added that a prolonged easing cycle of multiple consecutive 25 basis point cuts will ultimately drive gold prices higher once again.

Up,” said Adrian Day, President of Adrian Day Asset Management. “U.S. jobs growth was weaker than expected in the latest report, adding fuel to excitement over a Federal Reserve rate cut at its next meeting (Sept. 17-18). That cut is almost a certainty now. However, the expectations for a large cut are probably too high, and the market could be disappointed at that point. Much will depend on the commentary surrounding any cut, as well as Chairman Jerome Powell’s comments in his press conference. For now, however, the gold market will likely inch higher into the meeting.”

Mark Leibovit, publisher of the VR Metals/Resource Letter, thinks gold may be due for a pullback even though he likes the yellow metal over the longer term.

“I have been hedging our long positions with inverse ETFs in Gold and Silver,” he said. “History says the baby is thrown out with the bathwater (gold and silver) when overall market conditions sink.”

“Long-term bull (as most in the column are) but nervous short-term,” Leibovit added. “Getting a $200 to $300 correction is not out of the realm of possibility.”

Kevin Grady, President of Phoenix Futures and Options, said it’s all about the Fed right now.

“The question is: is it going to be 25 or 50 basis points?” he said. “We saw the other day, when the equity markets took a big hit, it was because they came out and said, ‘Look they're not leaning towards 50 basis points, it looks like it may be 25 basis points.’ I think the market wants 50 basis points, and I think that when you look at some of the things that are going on, especially the creation of jobs, government jobs are what's driving a lot of it, and that's just really not where we want to be. I think that when you look at all the data, the economy is not in fantastic shape.”

“And the other thing is, look at all the revisions that keep coming out,” he added. “That's really directing what's going on with the markets, and I think people are looking for 50 basis points in September.”

Grady said he disagrees with the view that the Fed would appear panicked if it kicked off the easing cycle with a 50-basis point cut. 

“I think that it would just be what's appropriate, and I don't think that would impact the market negatively,” he said. “The critique of the Fed lately, and for all moves really, even if you want to go back to 2008, is they're always late. Even when they started raising rates, they did them at 25 basis points to not signal panic, but the marketplace knew where it should be.”

“You just have to watch where the bonds are,” he said. “The bond market is always right, and I think the bond market was way ahead of the Fed. They always lead. So I think doing 50 basis points, I don't think that would signal panic.”

“The equity markets are showing no confidence in a 50-basis point cut, [but] gold has not done that,” Grady said. “But look, I don't think that's necessarily a bad thing in markets if gold went down to $2,300, especially going into the election, and especially going into a cycle where they're going to start cutting rates. I think you'd shake out some weak longs and it's very healthy for the market.”

Grady said there's been a lot of exuberance in the equity markets, and in the tech sector in particular. “It's an old trading adage, when everybody gets to one side of the boat, what happens? It tips over, and that's what's happening here,” he said. “I think a lot of people are diving in, especially on equities, thinking this is just going to keep going. But I do think that it's going to be fertile ground for gold, even for equities, when they start cutting rates.”

“There's a lot of money sitting on the sidelines that’s going to have to go into the equity markets and metals markets.”

Grady also cautioned gold market participants to avoid overreactions to price moves at these elevated levels.  

“What happens is a lot of people, especially traders, get caught up in it, because it's a big move,” he said. “But now you have to look at percentage moves. If we were talking back in the days with gold trading at $1,400 or $1,600, if you talk about $200 moves, you're like, ‘Oh my God, that's insane!’ But now, when the market's trading at $2,500, on a percentage basis it's not such a drastic thing. With these lofty prices, you're going to see corrections like that.”

This week, 14 analysts participated in the Kitco News Gold Survey, and the results showed a definitive shift in sentiment to the downside. Only four experts, or 29%, expect to see gold prices rise during the week ahead, while seven analysts, fully 50% of the total, believe gold will trade lower next week. The remaining three experts, or 21%, predicted more sideways chop for the precious metal.

Meanwhile, 177 votes were cast in Kitco’s online poll, with Main Street investors holding steady in positive territory. Exactly 100 retail traders, or 57%, looked for gold prices to rise next week. Only 29, or 16%, expected the yellow metal to trade lower, while 48 respondents, representing the remaining 27%, saw prices continuing to consolidate during the week ahead.

 

After a week dominated by employment data, inflation once again returns to the fore next week. Wednesday morning's release of U.S. CPI for August is the highlight, as well as the ECB interest rate decision on Thursday morning, with markets pricing in another 25-basis point cut from the central bank.

Thursday will also see the release of U.S. PPI for August, along with weekly jobless claims. The week wraps up with the Friday morning release of the preliminary University of Michigan consumer sentiment survey for September.

“Gold recovered from a three-day slump that saw it bottom on Wednesday near $2472 and after the US jobs report, spiked to almost $2530,” said Marc Chandler, Managing Director at Bannockburn Global Forex. “It stopped in front of the record high set in late August (~$2531.75).  I am not convinced it is ready to launch a new leg higher. Some more consolidation may be needed. Still, next week will likely see a softer CPI print, but it is clear that the labor market is more critical for the Fed in the current context.”

“The question is whether the jobs data, which saw a decline in the unemployment rate, increase in earnings and hours worked, is not sufficient to deter the Fed from cutting 50 bp later this month,” he added. “Odds in the futures market now near 56% up from about 42% before the jobs report.”

Sean Lusk, co-director of commercial hedging at Walsh Trading, said there was very little new information for markets in the employment report, and he’s taking his cues from oil prices.

“More of the same,” he said. “Growth is slowing. The energy markets are acting as the canary in the coal mine prior to some of the jobs data that we've been seeing this week. We've really come off here.”

“We're just way too overbought here in the stock market,” Lusk said. “There's just such a major disconnect between Wall Street and Main Street that, in my opinion, a correction is needed and warranted. If you're going to cut rates more, what is that telling you? That things aren't that good.”

Lusk said that he thinks 50 basis points isn’t overkill, it’s necessary. “25 is worthless,” he said, “so they're probably going to do 50. Or maybe they do two 25s, this meeting and the next.”

“Energy's what’s really driving things lower here, or inspiring not a lot of confidence,” he said. “Yeah, you may be paying less at the pump, but it's not going to be that much cash back in people's hands. Geopolitically, things have stalled. But the black swans are still circling. Gold doesn't know what to do here.”

“I think gold continues to shine, but we're going to see some trepidation seasonally,” he warned. “This is when they back off.”

At the time of writing, spot gold last traded at $2,495.51 per ounce for a loss of 0.85% on the day and 0.30% on the week.

This article originally appeared on Kitco News.