GoldPrice.

Happy Friday, traders; welcome back to our weekly market wrap on the last five trading days, focused on the events that mattered most to the precious metals and Dollar markets. Our trading this week was dominated by the brief and sudden escalation of tensions between the US and Iran, as well as the equally sudden cooling of the situation.

Likely any full trading week, following the previous two, holiday shortened trading weeks, would feel like a long one. But with a consistent run of market volatility around the world, the likes of which we haven’t seen for at least several months, this one has felt like a doozy. As we pull into the end of week that saw gold prices rise beyond 7-year highs, the yellow metal has pulled back considerably from mid-week but remains slightly elevated from last week’s close.

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So, what kind of week has it been?              

Gold Prices Burst Higher to Start the Week with Global Nerves on Edge

The market environment was decidedly tense on Monday morning, as a weekend of saber rattling and twitter threats between the White House on one side, and Iran and Iraq (an important US ally) roiled Asian and European equity markets with concern that leadership on both sides might just be willing to push the world over the brink. Gold spot had risen to a 7-year high at $1580/oz alongside soaring prices for Treasuries and crude oil; meanwhile, the US Dollar was falling further, and equities were down around the world.

As we posted our weekly preview, however, it seemed like some light was starting to peek through. With US traders and investors (based on recent experience, perhaps) choosing to see through the chest-pounding and move into some risk positions at temporarily “cheap” prices, US equity futures had begun firming up and gold’s gains pulled back slightly. Sure enough, within two hours of the markets opening in New York, the S&P had paired its losses and gold prices had fallen back to $1565 where the yellow metal would find some degree of technical support. By the day’s end, the S&P 500 would full reverse its fall and ultimately make gains for the session, while the morning’s surges in oil and Treasury paper moderated as well.

While there was some energy to Monday’s general rebound in risk appetite, it did feel as if a $20/oz pull-back in gold prices was a disproportionate move. They likely culprit was stronger than expected profit taking, as technical measures were describing gold prices as overbought to a degree that has only been met three previous times since 2000. In all three previous occurrences, the over-extension has been followed by a sell-off although each time the yellow metal eventually continued its rally.

Markets Rebounded and Gold Pulled Back in Hopes of Cooler Heads

Waking up to a considerably calmer market mood, Monday night’s Asian trading continued with the risk-on pattern, as equity markets recovered higher and gold prices fell briefly. Despite European stock markets also trading to the good, gold buyers began stepping back in at lower prices and lifted the spot chart back to $1565 ahead of Tuesday in the US markets.

The regular trading day was relatively quiet on Tuesday, at least compared to the volatile markets of Sunday/Monday. The most recent read on service sector PMI from ISM proved slightly better than expectations which lifted the Greenback and calmed some of the worries exacerbated by the continued faltering of the US manufacturing sector as indicated by last Friday’s poor ISM Manufacturing Index report. Otherwise, headlines were fairly quiet aside from the occasional salvo of rhetoric from Washington or Tehran. The general sense of continued—if muted—tension saw gold spot prices lifted back to $1570/oz and above. It seemed to many like an easy call to buy into the reliable safe haven asset at levels that were cheap relative to Monday’s fireworks, particularly as the risks of escalation hadn’t actually gone away. As it turned out, it was a good call, too.

Iran’s Retaliatory Strike Panicked Markets and Briefly Sent Gold Beyond a 7-year High

In the early evening of Tuesday, Iranian military forces launched over a dozen rockets at a large military base inside Iraq that houses a number of US military units. Several of the rockets hit their target, and as the world’s media tried to assess the impact and potential for casualties, global markets panicked and dropped. Alongside a flood into other safe haven assets, gold prices flew to levels we hadn’t seen for the better part of a decade:

There it goes - gold rises above $1,600/oz for the first time since 2013. pic.twitter.com/sZ6oCUDYLg

— Tracy Alloway (@tracyalloway) January 8, 2020

As observers waited to see what the US’ immediate response would be, major assets around the world continued to react just as you would expect them to in the face of potential “hot” conflict in the Middle East.

Thankfully—and, if I’m being honest, maybe a bit unexpectedly—it became clear on Tuesday night that powers in Washington were taking the time to understand the situation rather than immediately retaliating in the way the POTUS had threatened to do just the day before. As the smoke cleared and the algo-traders faded, markets began to step back from the edge. Gold’s trip above $1600 was relatively short-lived, as global observers and world markets grew hopeful that the Iranian response was a.) the “least bad” that a retaliatory missile strike could be (in terms of damage and casualties,) and b.) a catalyst for cooling of tensions between the long-time adversaries.

Risk Markets Rallied in Relief as Washington and Tehran Stepped Back from the Edge

By the time US traders—those who had gotten any sleep, at least—were coming online for Wednesday’s book of business, it had become clear that there were no casualties from the “attack” and that Iraqi and perhaps American forces had been forewarned by Tehran. With POTUS scheduled to address the nation, global equities had rallied with US futures having fully pared their initial losses and starting to move higher. Gold spot had given up as much as $30/oz from the highs, trading at a still-elevated $1575. In his mid-morning televised address, Donald Trump took the opportunity provided to cool the rhetoric and threats around the situation, and confirmed the hopes of many that there would be no military reprisal from the United States but instead a new series of sanctions on Iran—punitive in nature, but theoretically in hopes of driving Tehran back to the negotiation table.

Two charts very effectively tell the story of the markets’ reaction. First, the de-escalation prompted a swift return to risk-on positioning:

S&P 500 record high pic.twitter.com/yFFhy9vGMG

— Luke Kawa (@LJKawa) January 8, 2020

And it was clear which assets those positions were flowing out of:

Gold tumbles https://t.co/AyYiCo0cJt pic.twitter.com/Z4u08waJYn

— Bloomberg Markets (@markets) January 8, 2020

The remainder of the day’s trading was marked by a strong, consistent relief rally in equities that kept gold prices pinned to support levels near $1550/oz.

Later in the day, in a story that’s turned out to be more persistent in the headlines than the confirmed military strike, it was confirmed that a commercial airliner taking off from Tehran had crashed, killing all aboard including 63 Canadian citizens. Gold prices briefly burst higher again late Wednesday afternoon on the first reports that US authorities believed that the jet may have been shot out of the sky by and Iranian missile. That report has since confirmed by Washington, and the Canadian government has claimed the view as well while Iran stringently denies it.

Market Appetite for Risk Increased with Chinese Confirming “Phase One” Signing

In all the tension these last ten days around the threat of actual war, it would be easy to forget that we’re still more than two years into a damaging trade war between the world’s two largest economies. Just as the odds of conflict in the Middle East seemed to be cooling, in the earliest hours of Thursday morning the Chinese trade delegations finally confirmed their sides intention to sign the agreed upon “phase one” to a trade deal during their scheduled visit to the US next week. It’s certainly not the end of the line—who knows what the drama around “phase two” will look like—but it provided a second cool rush of relief to the world’s agitated markets this week. With the announcement, risk appetite in major assets grew further, and safe havens sold-off with gold’s spot price briefly dropping as low as $1540/oz.

Middle of the Road Jobs Data Sends Us into the Weekend with Slightly Elevated Gold Prices

From those low points of the trading week, the yellow metal climbed back to support at $1550 during the European session, and although the broad relief rally in global equites has continued into the weekend, gold continues to find some slight upward momentum. There was another brief spike in spot price this morning on the release of December’s Jobs Report, with the number of jobs added through non-farm payrolls coming in slightly below expectations at 145,000. Experience tells me this was more than likely the work of programed algo-traders, reacting in code to the lower-than-expected print and the differential between this month and November’s stellar data, without analyzing the context. While lower than anticipated, 145k is still a fairly healthy number (particularly with unemployment still pinned at 3.5%) and is within touching distance of the 10-year average. Fitting, then, that gold prices pretty quickly pulled back from the sudden rise higher.

Over the remainder of the trading day, we have seen gold trading steadily upward and back into the neighborhood of $1560. The yellow metal has been lifted in part by the persistence of tense disagreement between the Western powers and Iran over the downed passenger jet, but also by the news that the new round of US sanctions against Iran will target the countries metal exports.  

Next Up

We have new consumer inflation data to dominate next week’s data calendar alongside update Retail Sales numbers, although it goes without saying that geopolitical tension and the planned signing of an initial stage in the US-China trade agreement will dominate the market narrative above all else.

Keep an eye out for any Saturday or Sunday headlines, traders. But mostly get out there and enjoy your weekend—we’ve certainly earned a calm one. After that, I’ll see you all back here on Monday for a look at the next week ahead.