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Gold dips as the bulls take a breath

13 August 2021

Friday 13 August 2021

In this week's market report:

  • Gold didn’t like the data
  • Obvious in hindsight
  • A note on silver
  • Inside our office this week
Shae Russell

Shae Russell,
Group Communications Manager

Dear Investor,

When gold gives you a buying opportunity…

(Click to enlarge)

Source: Trading View

Gold dropped but the long term fundamentals stick: The perils of reporting data on an Australian Friday afternoon, is that it doesn’t reflect the data that comes out from America while we’re sleeping. Last week’s non government ADP employment data was reported in time for us to digest however government NonFarm payroll data wasn’t released until near midnight our time.

This data then set off a chain of unexpected events in the gold price.

Jobs data surprised to the upside, gold fell a little: US NonFarm numbers were significantly higher than expected.

  • The market was anticipating 845,000 new jobs to be added yet NonFarm payroll surprised to the upside with 943,000 new jobs, one third of those coming from hospitality and leisure.

  • On receipt of the news, gold traded down over 1%, from US$1,800 to US$1,769 then ended the trading week at US$1,760.

  • This isn’t what caused the slide in the gold spot price. More below.

Does this good news mean it’s ‘risk on’?: In short no. Good US domestic data does not mitigate broader global concerns. Analysts are not yet in a ‘risk on’ frame of mind. The focus for many will now be on the strengthening US dollar, interest rate differentials and the hawkish comments from the Federal Reserve Bank.

These NonFarm numbers, however, means all eyes and ears turn to the Federal Reserve Bank.

Eyes on the Fed: Friday’s data means we should review three key statements from Federal Reserve Bank’s Vice Chair Richard Clarida’s speech last week:.

  • GDP growth this year is projected to be 7 percent on a Q4-over-Q4 basis, which, if realized, would represent the fastest four-quarter GDP growth since the 1980s.’
  • But let me be clear on two points. First, if, as projected, core PCE inflation this year does come in at, or certainly above, 3 percent, I will consider that much more than a "moderate" overshoot of our 2 percent longer-run inflation objective. Second, as always, there are risks to any outlook, and I believe that the risks to my outlook for inflation are to the upside.’
  • In our December 2020 FOMC statement, we indicated, and have reaffirmed since then, that we will maintain the pace of Treasury and MBS purchases at US$80 billion and US$40 billion per month, respectively, until "substantial further progress" has been made toward our maximum-employment and price-stability goals. Since then, the economy has made progress toward these goals.

Two more Fed members speak: Two other Federal Reserve members have weighed in this week, expressing hawkish views. The usually dovish president of the San Francisco Federal Reserve Mary Daly said perhaps now is the time to look at ‘dialling back accommodative policy.

Traditional hawk however, Robert Kaplan, president of the Dallas Federal Reserve Bank says he favours announcing a plan at the end of September and beginning tapering in October.

Speculation about Jackson Hole increases: US central bankers are reminding the market what metrics they are watching and Clarida has pointed to the stronger than expected data, which no doubt will lead any decisions from the Fed.

  • The next major meeting for the Federal Reserve Bank is in the last week of August at Jackson Hole.
  • Those in the markets are anticipating Jackson Hole may be where the taper conversation becomes serious, with a potential plan on what the end of stimulus will look like for the US.

Gold didn’t like the data

Understanding the sell-off: The gold spot price rarely sells-off this much, so it is newsworthy. Though this slide to Hades is not evidence or proof of nefarious doings. Our friends over at Monetary Metals explained this well during the week.

Rather, this week’s movements in gold was a basic lesson in market dynamics. Every buyer must have a seller. When this equation is unbalanced, you have price spikes. Both up and down.

While the gold price didn’t like US jobs data, the bigger moves happened when the Asian markets opened on Monday 9th August, falling 4.8% in the first two hours:

December gold futures CME with volume
60-minute chart

December gold futures CME with volume 60-minute chart

(Click to enlarge)

Source: Bloomberg; Updata

Two things to note: The blue box on the left side of the chart reflects the close of the US trading session, whereas the red boxes on the right side is the opening of the Asian trading session.

One third the volume: During the US trading session we can see in the bottom of the chart there was a significant number of contracts trading hourly on Friday.

  • Some 7.20 million troy ounces (toz) of gold were traded for each 60 minutes on the futures exchange. This is a large volume of trading (second highest for the month). This entire trading range was quite tight, between US$1,811-US$1,833, a US$22 total move.

  • By Monday the hourly volume has dropped to 2.3 million (tozs). That’s one third of the hourly volume on Friday. This resulted in bigger price movements on Monday, increasing to US$1,678-1,760. Giving us a trading range off US$82 per ounce — a tripling of Friday’s.

  • Three times the amount of trading took place on Friday afternoon, but the market had enough liquidity to keep the gold price range tight.

Key markets were closed, exacerbating the falls: Both the Japanese and Singaporean markets were closed on Monday removing important volume from the Asian markets. Meaning there weren’t enough buyers to absorb the selling.

Open strikes and margins calls kept the price down: Compounding the selling were the open strikes and margin calls. The lack of liquidity meant stops were triggered keeping the price low.

There are reasons to be bullish: Invest like the East. Gold bulls should see this price dive as an opportunity to increase their gold position.

For the bears: Technically speaking, the US dollar price of gold is going to struggle to break higher in the coming weeks.

In Australian dollars this means: Gold in our currency wasn’t spared either, down as much as 9.7% in the early hours of Monday. The Aussie dollar gold price has recovered and is trading at AU$2,388 at the time of writing. Supporting the Australian dollar gold price is the declining value of the Aussie dollar, down to 73.38 US cents.

Once again Australia’s currency is acting a buffer to the US dollar gold price moves. 

Obvious in hindsight

To know where gold is going, you need to know where it’s been: The plunge on Monday was unexpected, but it did take gold back to some natural support levels, as shown in the rectangle below:

US Dollar gold price
Daily Chart

(Click to enlarge)

Source: Bloomberg; Updata

Reaching support is important as it reduces the likelihood gold will fall further. Though it should be noted this week’s action disrupts the previous uptrend that was forming in gold.

Gold will struggle to get above the red trend line in the coming weeks. Consolidation around here would be positive for the gold price.

A note on silver

The gold to silver ratio has moved north again, reaching 74 this week. Today it would take 74 ounces of silver to buy one ounce of gold. With the gold to silver ratio climbing, this tells us that silver is starting to look cheap in comparison to gold.

Gold to silver ratio
Daily price

(Click to enlarge)


Inside our office this week

Gold may have dipped at the start of the week, but many of our clients know a buying opportunity when they see one. Clients have been increasing their gold position, however this week silver is the more sought out precious metal.

Our Sales Team has been working with clients to arrange click & collect or delivery for those that can’t get into the office. Call them on 1300 361 261 to discuss how they can help you.

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion

PS – Both our Sydney and Melbourne office are open for click & collect only. Brisbane and Perth are operating as usual.

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