GoldPrice.

Happy Friday, traders. Welcome back to our weekly market wrap, covering the last four trading days with a focus on the news, market narratives, and economic data that had the most impact on the price of gold (and may continue to do so,) as well as the Dollar and other correlated assets.

Remarkably gold prices are trading relatively flat to last Friday’s close, at the end of a tumultuous, holiday-shortened week. In the last four days we’ve seen an unexpected test of the strength of gold’s support at $1700 as risk markets chose to rally on market optimism above all else, followed (perhaps inevitably) by reality land hard on the market’s exuberance in the last 24 hours which has allowed gold and other safe havens to finish the month of May back on the front foot.

So, what kind of week has it been?

Tuesday: Markets Focused on Recovery Prospects Over Trade Tension, Gold Sold Off as Risk Appetite Soars on Optimism

Markets were back to full trading swing on Tuesday after Monday’s bank holidays in the US and UK, and investors greeted the final week of May with a worldwide surge in risk appetite that slammed gold prices lower as equities ripped higher. In the spot markets, the downward slide that began with the open of US stock markets would force the first challenge to major support at $1700/oz in two weeks.

The market’s optimism was once again driven by what seemed like a conscious choice to turn the focus towards the cautiously successful steps towards reopening parts of the US and global economies, and the continuing flood of monetary and financial stimulus supporting the financial system. This, of course, to the detriment of attention being paid to the deterioration of calm between the US and China—a shadow that would get harder to ignore as the week went on. Sure enough, what was initially an exuberant rally in US stock prices was dampened somewhat in the afternoon by reports that the US government was considering strong sanctions against Chinese officials in response to the mainland government’s recent grab for greater control of previously autonomous Hong Kong.

Despite the distraction, equities won the day, encouraged from a run of optimistic recovery forecasting from no less than JPMorgan’s Jamie Dimon and key FOMC member James Bullard (St. Louis.) As the S&P 500 held on to an 11-week high and US bonds saw strong selling through the day, gold spot prices closed Tuesday out neat the bottom of the daily band at $1710.

Wednesday: Deepening US-China Tension Supported Gold Even as Dubious Optimism Prolonged the Rally in Equity Markets

The feel-good rally circled the globe during the Tuesday/Wednesday overnight sessions as both Asian and Europe saw gains in their major stock markets with investors still celebrating progressive re-openings and flushes of fiscal stimulus throughout the world economy. Although gold prices were relatively unchanged in foreign markets, the second surge of risk appetite as US trade desks logged-on pushed safe haven assets sharply lower; even King Dollar, to some extent. Here is where gold’s spot price broke a fortnight-long run above $1700/oz.

Major U.S. stock indexes opened higher this morning, as investors continued to cheer efforts to reopen portions of the economy.

Follow along with the latest stock market updates here: https://t.co/63COyR7g5j

— CNBC (@CNBC) May 27, 2020

Pushing below a major psychological level certainly added some momentum to gold’s initial drop, but the yellow metal quickly attracted a number of buyers in short order and recovered $1700 within an hour of stock markets opening for the day. Likewise, silver spot prices were caught in the early morning shake up but had little trouble pulling back above $17/oz.

From the renewed level of support, gold prices tore higher mid-day on Wednesday. It was then that US Secretary of State Mike Pompeo announced that the US government no longer recognizes Hong Kong as autonomous from China as a result of the mainland Chinese government’s recent maneuvers to assert greater control over the area. Aside from representing yet another deep crack in the crumbling trade peace between the US and China, the State Department’s claim and still-unknown repercussions and reprisals from Washington and Beijing prove a threat to the status quo of Hong Kong as a global trading hub by virtue of it’s “special status.” Understanding this, it’s no surprise that the news sent investors grabbing for safety again, and driving gold prices (as well as prices for US Treasury debt) considerably higher; gold spot rose as high as $1715/oz before enduring some profit-taking just ahead of Wednesday close.

In other news on Wednesday, the day’s FedSpeak was of some importance. James Bullard once again struck a hopeful tone, suggesting that the brutality of the economic damage in April may be as bad as it gets. New York Fed President John Williams, meanwhile, suggested that the Fed is more seriously weighing the use of the unconventional policy of “yield-curve controls” in an effort to support the economy through a strong recovery. (We touched briefly on this possibility in last week’s piece on Negative Interest Rate Policy.)

NY Fed's John Williams on Bloomberg: Yield curve control is "a tool I think that could potentially complement forward guidance and other policy actions."

Adds: "It's something we're thinking hard about."

— Brian Cheung (@bcheungz) May 27, 2020

The one-two punch of optimistic outlook and easy money for longer of course further enabled the willingness in markets to overlook downside risks in favor of trading on optimism: US stocks continued to outperform, with the S&P 500 scoring an important technical milestone with its close above the 200-day moving average.

Thursday: US-China Tensions Finally Took the Driver’s Seat, Risk-Aversion Lifted Gold as Stocks Reeled

Foreign markets again continued the reach for risk assets overnight with as news like that of a massive $2.6 trillion financial rescue plan authorized by the EU helped equity markets to continue moving higher. By the start of US trading though, the mood had become more ominous as China (as expected) called Washington’s bluff and officially approved the controversial security legislation that codifies the mainland’s increased control over Hong Kong. Gold prices had steadily climbed higher amid the tension and traded as high as $1725 in the morning ahead of the US stock markets’ open.

Thursday’s US economic data provided more positive signals for investors to latch on to: weekly jobless claims are still brutally high but we reported in-line with expectations and continue to lower the four-week average, the first revision to Q1 GDP wasn’t nearly as ugly as many analysts (myself included) thought might be coming, and Durable Goods Orders for April (when excluding albatross of transportation/aircraft orders) only reported just over half of the anticipated drop. None of these point to a surefire recovery, nor do the three points taken as a whole, but the narrative all week has held that the stock market doesn’t need much in the way of objective evidence to keep moving higher; sure enough, US equities spiked higher at the open. The move in-turn knocked gold off of its pre-market gains and back down to $1715 through the morning trading.

The turn, for the session and the week, came mid-afternoon. An hour before the stock market close, Donald Trump announced a press conference for Friday focused on China. With no further details offered, traders’ speculation was finally pulled towards the dark clouds that had been looming all week around the US-China trade truce. Pressed by fear for what aggressive threats or sanctions could do to a global economy that is uniquely ill-prepared to weather another trade war, US equities plummeted into the close, erasing all of Thursday’s gains and finishing in the red. Gold took part in the safe haven rally, moving back towards $1720/oz.

Friday: Gold Prices Have Regained the Week of Losses as Markets Brace for US-China Crossfire Heading into the Weekend

Although the yellow metal’s price chart largely stabilized through Asian’s final session of the week global stock markets’ initial reaction to the heating of US-China trade tensions showed a continued reeling-back of risk appetite, as did steady buying in US Treasury debt. Gold began riding the risk-off wave higher through the European morning; ahead of this morning’s PCE inflation report the yellow metal was trading at a $10 gain.

So far today, the major US stock indices are marked just slightly lower for the day, but gold and other safe havens assets have enjoyed continued support as the day rolls toward a White House press conference (time as yet unannounced) that may have unknown ramifications for global trade. Gold in particular has been given a further boost by Federal Reserve Chairman Jerome Powell’s appearance this morning, which caps off the public commentary available for this FOMC cycle. The chairman had relatively little to say about specific monetary policy but did enough to further the narrative that rates will remain ultra-low for the foreseeable future, a reality that has been a primary driver of gold strength since the end of March.

“This is an emergency of a nature that we haven’t really seen before,” Fed Chair Powell says about the coronavirus crisis. “At the beginning of this, my colleagues and I really saw that we needed to be using our tools to their fullest extent.” https://t.co/53tzfJe8p1 pic.twitter.com/mN9882sAlb

— CNBC (@CNBC) May 29, 2020

At the time of writing, POTUS’ press conference is as-yet unscheduled. While markets are generally calming down for the end of the week, it looks awfully similar to bracing for impact. Gold prices, for their part, have managed to rally all the way to $1735/oz and higher, flat to last week’s close.

Next Up

We’ve got a busy economic calendar next week, starting off with updated PMI’s for the US economy, and wrapping with May’s jobs report. A lot of the week will be spent looking ahead to how bad (or improved) the headline unemployment rate will look, but the one thing we can say well ahead of Donald Trump’s presser this afternoon is that the US and China’s accelerating slap-fight will likely be the dominant narrative to begin the month of June.

First, though, a weekend. I hope you’ll do your best to enjoy it, traders, and to say healthy. I’ll see everyone back here on Monday for our weekly calendar preview.