Shunned By The Market, Gold Struggles To Catch A Breather

Summary

• Gold's prices have resembled nothing short of a landslide this year, despite macro forces building up a cocktail of uncertainty.
• Gold's puzzling slide might catch a breather soon, given a series of upcoming catalysts in the market that could give it a boost.
• Net positioning in Gold is relatively neutral after this year's clear-out, hence investors would not be entering at frothy levels.

Gold's (GLD) price performance has been peculiar of late. Amidst a backdrop of a stronger USD, yes perhaps that has placed some downward pressure on the precious metal, but it appears the market has been utterly shunning the precious metal, even when other macro forces appear to be supportive of the qualities that typically help Gold shine. XAUUSD closes the week at $1,213 per ounce, just shy of the $1,200 psychological level.

Recall that these are troubling, choppy, and uncertain times. The US Treasury curve is flattening, with just about 35 basis points separating the yields on the 10-year and 2-year. The Federal Reserve has embarked on a faster-than-expected rate hike trajectory, and is now in line to hike 4 times this year. Already, emerging market assets have felt the brunt of the pain, while we can only watch and see the consequences higher interest rates might have on an 8-year equity bull market. Has the great QE experiment led to elevated asset prices, and will a reversal in QE lead to a similar reversal in asset prices? Maybe. That is anyone's guess, but the point is we are indeed entering an unprecedented period of time in the financial markets. Yet, Gold prices have remained cowed.

After taking into account the possibility that the trade war between US and China might be more protracted than previously feared, Gold's unilateral movement downwards has been all the more puzzling. US and China now seem to be digging their heels in for a longer stalemate, with Trump preparing a $12bn war chest to help US farmers tide through difficult times, while China has embarked on a mixture of fiscal and monetary policy to support the economy. China has been accommodative to a weak CNH, via a series of currency fixes on the weak side. A weak CNH would of course help to negate the impact of any potential import tariffs erected by the US by increasing the competitiveness of China's exports. With the 2 largest economies stuck in negotiation-gridlock, Gold still has not found a foothold.

Perhaps the market has been placing more weight on the prospect of rising interest rates over other macro developments, which decreases the demand for a zero-carry asset like Gold. However, if we drill down to the most basic reasons for the Federal Reserve actively pushing for more rate hikes, we see that it is because the central bank wants to combat rising inflationary pressures in the economy. Historically, Gold has been used as a store of value, especially in times of inflation. Its price movement opposite to that of inflation has been surprising.

Irregardless of the reasons, XAUUSD now finds itself near $1,200, an attractive level considering it was trading at $1,350 at the start of this year. We are not without catalysts that could send Gold prices higher as well. Aside from aforementioned reasons, Italy could be set for rocky budget discussions between its populist leaders and Finance minister. Italian 10-year bond yields have broken above 3% for the first time in 2 months on fears that a non-productive meeting could pose more question marks over the state of the economy, with Italy holding the 2nd highest amount of debt in the Eurozone after Greece.

Concerns over the state of the Eurozone, in the bigger scheme of things, could push back the European Central Bank's timeline to raise interest rates. Lower for longer, would of course be supportive for Gold. Last week, Bank of Japan also caught the market by surprise with a dovish conclusion to its meeting, with his unexpected declaration to stay committed to lower interest rates for an "extended period of time".

Positioning in Gold is now more neutral, following XAUUSD's fallout from the start of the year. CFTC speculative net positioning in Gold, as seen from the chart below, shows net positioning in XAUUSD currently close to zero / neutral levels. This reduces the risk of investors entering the market when it is too frothy.

CFTC Gold speculative net positions

From a technical standpoint, XAUUSD is currently trading at support levels $1,205, levels last seen in May 2017. I would recommend investors building a position at current levels, with a view that the financial markets would throw up more unwanted surprises by the end of the year. A target of $1,300 is not overly ambitious, current levels are relatively comfortable to hold for the long haul as an insurance for a portfolio of equity positions.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.