GoldPrice.

Happy Friday, traders. Welcome to your recap of the week in the precious metals markets.

At the time of writing this afternoon, gold prices appear set to close firmly higher for the week as a relatively calm gold chart over the last four days has been roiled by the sudden reemergence of concerns around the next round of trade negotiations between the US and China.

So, what kind of week has it been?

Gold Prices Held Near to $1500/oz pre-FOMC Despite Disorder in Energy & Lending Markets

Following our preview post on Monday, the rest of the day’s trading was dominated by the headlines around the weekend attack on a major Saudi oil facility that had everyone’s geopolitical fear gauges at least somewhat elevated. The sudden spike in risk-aversion throughout the market began to subside as the day carried on and it became more evident that we wouldn’t see things escalate to armed conflict; despite some initial chest-thumping from Washington, it was obvious that the White House would find very little support in Congress for military action. With tensions evening out, the safe-haven demand that kicked-off with a bang on Sunday evening waned and gold spot prices drifted back before $1500/oz.

The news flow surrounding the drone attacks in Saudi Arabia would persist as a kind of low hum in the background throughout the week, but after Monday’s close it didn’t really feel like a market driver—at least not in terms of metals or US Dollar trading. Over the following days the US State Department would repeat its belief that Iran was responsible for the attacks, directly or otherwise, and Iran flatly denied the allegations. The Saudis themselves would claim the same conclusion as Washington on Wednesday. But once it became clear that there would be no military response and that Saudi facility would likely be back to 100% capacity within weeks rather than months, there was very little market response to the story’s further developments. That’s not to say there can’t be serious issues for commodity markets down the line that stem from this. For one: it’s alarming that as much as 5% of global oil supply was completely taken offline by such a simple drone strike; so, while oil prices have drifted steadily downward from their Sunday night peaks I do think a pulse of unease will remain in the energy markets for the immediate future—but not enough to impact that overall commodity complex without another major event.

Looking a simple spot price chart, it’s obvious that most of this week’s gold trading anchored around the all-important $1500/oz level; and while it looked at the end of Monday as if the FOMC’s announcements would land with the yellow metal playing just below that mark, Tuesday’s money markets flipped things around, with the Federal Reserve being forced to step in to rebalance a sudden liquidity issue in the overnight lending mechanism.

Now, money markets in general—and even “repo rates” specifically—are a very complex finance topic that doesn’t lend itself well to explanations that fit into a single paragraph. For those who want an explanation, Bloomberg has a very solid breakdown here; the simplified version of Tuesday’s “event” is this: due to a variety of factors, there was been a sudden tightening of liquidity in overnight borrowing markets and the cost of that borrowing temporarily skyrocketed which could have some very negative effects on the US (and global) economy if unchecked; starting Tuesday morning, the Federal Reserve resumed “open-market operations” (bond-buying) to rebalance the math. As of this morning, the fourth day of OMO, the Fed’s work seems to have done the job, for now.

It's the smart thing to do to keep an eye on this mechanism going forward; but, as with different variations of a yield-curve inversion, this kind of event in the lending markets can be an ominous sign for the US (or global!) economy—this fear is what drove gold prices back as high as $1506/oz on Tuesday morning before they settled back down near $1500 ahead of the FOMC—but it can also be just another odd market move that we’ll have forgotten in a month (which explains the ultimately muted reaction in gold and other safe havens.) There’s been a lot of deeply irresponsible, fear-mongering headlines about the repo rate moves this week, and they’re almost always related to someone trying to sell you something. Better put:

If you're doing multi-day threads calling the NY Fed OMOs a bailout, you're either incredibly bad at this or mendacious in the extreme. Y'all know who you are, and should be ashamed of yourselves.

— George Pearkes (@pearkes) September 20, 2019

Also on Tuesday (and almost entirely overshadowed by the money markets,) US Industrial Production strongly outperformed expectations for August. I’d say that this strong-Dollar input certainly contributed to gold’s muted rally.  Likewise, Wednesday morning’s housing data was an upside beat fo the US economy.

Gold Prices Fluctuated on a Fractured FOMC Decision, Ultimately Remain Muted

Also on Tuesday (and almost entirely overshadowed by the money markets,) US Industrial Production strongly outperformed expectations for August. I’d say that this strong-Dollar input certainly contributed to gold’s muted rally.  Likewise, Wednesday morning’s housing data was an upside beat for the US economy.

Regular readers will know that I generally try to avoid re-recapping FOMC meetings in these Friday reviews, and instead take the easy out of pointing you towards our detailed breakdown of the event, which this month was a second consecutive cut to short-term interest rates of 25bps and a press-conference threaded with signs of the Fed’s reluctance to apply further easing, but also its willingness to do so if necessary.

In terms of the gold prices, the chart virtually ran a 24-hour roundtrip, having come into Fed Day slightly above $1500/oz and, after the market gyrations we discussed on Wednesday, pricing the yellow metal at similar levels as New York traders began their Thursday session.

Gold Prices Are Rallying to Weekly Highs After Trade Tensions Were Re-Lit This Afternoon

The gold market between Thursday morning and today—or, at least, until just after lunchtime today—was by and large very dull. In the overnight, the Bank of Japan’s policy meeting delivered a no decision, although the committee’s language in their statement had some analysts saying the groundwork is being laid for further easing; for their part, the Bank of England’s refreshed statement was a dull non-event aside from the now-perfunctory warnings about a no-deal Brexit. Thursday’s gold prices traded choppy through the morning around the $1500/oz level before drifting steadily lower throughout the afternoon to close just below at 15-handle. All things considered (including a solid data set from the Philly Fed’s Manufacturing Index,) it was a relatively quiet day in markets that allowed the appetite for risk to creep back in and saw the Dollar strengthening.

Today’s session initially looked like it would be more of the same, particularly with a quiet macroeconomic calendar to close the week. Gold prices began the US session virtually nailed on to $1500 (having shown solid resistance to an early morning sell-off,) and though prices were moving steadily (if mildly) upward throughout the morning it felt unlikely that the yellow metal would have much to offer above $1505 and would be at risk of another profit-taking Friday sell-off that this time might drive prices markedly below $1500.

Looking back, maybe it was foolish to think we were getting through an entire market week without another round of US-China trade drama. Around midday today, reports surfaced the advance Chinese trade delegation is cutting its US visit short and returning home—never a particularly positive sign for negotiations. Also not a positive sign? The US president calling China “a threat to the world.” Needless to say, market concerns about the ongoing trade conflict are back in the drivers seat. US stocks with links to China, so far, are taking the first round of damage and pulling the overall equity indices down with them:

China-linked U.S. stocks fell as much as 1% after Chinese delegation reportedly cancels trip to Montana (via Reuters) pic.twitter.com/NKGtsSqdxK

— Luke Kawa (@LJKawa) September 20, 2019

Slumping tech stocks are dragging on U.S. indexes https://t.co/nA2zTAssb4 pic.twitter.com/yZTtCcL7Gg

— Bloomberg (@business) September 20, 2019

As one would expect from risk assets dropping like that, gold prices have moved considerably higher and look set to close at their highest level all week.

Next Up

The macro calendar for next week is, so far, looking a little sparse. We have a little bit of data on the manufacturing sector due, and Durable Goods on Friday but little else. To me, that primes markets for a reactive week in which geopolitical and trade headlines will be the dominant force in metals and Dollar trading. As always, on Monday we’ll have a breakdown of the week ahead.

Until then, traders, enjoy your weekend. I’ll see you all back here on Monday,