11/7/2024

Gold still weighed by risk-on flows and dollar strength

OUTSIDE MARKET DEVELOPMENTS: It appears that the Republican Party has secured control of the House of Representatives. The 270ToWin site shows the GOP with 219 seats, one seat beyond the 218 majority threshold, with six races yet to call. The AP has yet to call a number of close races and their count remains at 214-205.

Trump is expected to push Russia and Ukraine toward a negotiated peace deal, but Ukraine is loath to give up any of its territory. While Trump is a staunch supporter of Israel, he indicated at the GOP convention that if elected he wanted Israel to wrap up operations before inauguration day. He has also demanded Hamas release the remaining hostages by 20-Jan or it will pay “​​a very big price.”

Perhaps there is some optimism about these foreign policy tactics built into the so-called "Trump trade." If the war in Ukraine and Israel's war with Iran and its proxies are wound down, it would be a major coup for the new President. However, new geopolitical hotspots are likely to flare.

The President-elect has been busy over the past week filling cabinet posts. China hawk Mike Walz has been tapped as National Security Advisor. Marco Rubio, another Israel-friendly foreign policy hawk, is widely expected to be named Secretary of State.

Amid Trump's frequent talk of tariffs trade tensions with China are already on the rise and are perhaps being amplified by the Middle Kingdom's existing economic woes. Tensions with Mexico are ramping up as well, on trade and anticipated pressure to staunch the flow of illegal immigrants to the U.S.

The FOMC studiously avoided commenting on the election last week and FedSpeak thus far today has been mum on that topic. As I said right after the election, the Fed is unlikely to alter monetary policy based on campaign rhetoric. When that rhetoric transitions to policy, that's another story.

The market has priced in about a 35% chance of a December hold by the Fed. That could creep up if forward-looking indicators continue to reflect economic optimism.

Case in point: 

U.S. RCM/TIPP Economic Optimism Index surged 13.4% to a 39-month high of 53.2 in November, versus 46.9 in October. That print is 8.3% above the historic average of 49.1.

"The index had been in negative territory for 38 consecutive months, starting in September 2021, and broke out decisively in November after President Donald Trump's historic return as the 47th President," said Real Clear Markets. 

U.S. NFIB Small Business Optimism Index rose 2.2 points to 93.7 in October, above expectations of 92.0, versus 91.5 in September. While nine of ten components rose, it was the 34th consecutive month below the 50-year average of 98.

The NFIB's uncertainty Index humped to a record high of 110 ahead of the election. “With the election over, small business owners will begin to feel less uncertain about future business conditions,” said NFIB Chief Economist Bill Dunkelberg.


GOLD

OVERNIGHT CHANGE THROUGH 6:00 AM CDT: -$21.89 (-0.84%)
5-Day Change: -$143.42 (-5.23%)
YTD Range: $1,986.16 - $2,789.68
52-Week Range: $1,812.39 - $2,789.68
Weighted Alpha: +29.45

Gold remains under pressure, reaching an eight-week low of $2,591.64 as the "Trump trade" continues to broadly impact global markets. The traditional inverse relationship between the yellow metal and the dollar seems to have re-exerted itself with gains in the greenback pushing gold lower.

 

Market worries that Trump policies may restoke inflation and cause the Fed to become less dovish are contributing to the dollar's gains. Additionally, optimism about the U.S. economy has sparked increased foreign flows into U.S. shares. Dollars are needed to make those stock purchases.

The World Gold Council saw a GOP win as increasing the opportunity costs for holding gold. That seems to be how things are shaking out in the immediate aftermath of the election.
  

That being said, the WGC views this as a "near-term phenomenon" and expects market focus to shift back to the following "more fundamental concerns":

• A world where protectionism is likely going to be more acute and current conflicts see no signs of abatement
• Equity markets are heavily concentrated and richly valued during the end of a business cycle
• Cryptocurrencies continue to be a marginal consideration and not a replacement for gold
• Western investors have, outside of futures, not added much gold this year and so there is unlikely a slew of sellers in the wings.

The Trump administration is perceived to be crypto-friendly, which has led to strong gains in BitCoin, Ethereum, and others. In the alternative asset realm, I suspect the rotation out of gold to crypto is not insignificant. Whether that's a sticky rotation or just a trade remains to be seen.

Gold's breach of important chart/trendline support at $2,606.62/$2,604.16 (10-Oct) leaves the downside vulnerable. The next significant support zone I'm watching is defined by the 18-Sep low at $2,549.18 and the rising 100-day moving average which is at $2,538.02 today.

The magnitude of the fall from the 30-Oct record high at $2,789.68 to today's low is just over 7%, still within the parameters of a correction. That cuts into the YTD gains significantly, but the yellow metal is still up more than 25% in 2024.

With the market increasingly oversold there is scope for a short-term bounce. Initial resistance is marked by today's Asian high at $2,625.32. Above that, additional resistances are noted at $2,648.04 (50-day MA), $2,685.11 (yesterday's high), and $2,690.66 (halfway-back point of the decline).

Silver extended losses to trade briefly below the 100-day moving average, but has since bounced modestly to trade higher in the day. Weak gold, a strong dollar, and ongoing concerns about Chinese economic weakness continue to pose headwinds for the white metal. 



Enthusiasm about a potentially more robust U.S. economy may be counterbalancing the worries about China, at least to some degree. However, I think it's still going to be a while before the post-election dust settles.

A more convincing violation of support at $30.229 (9-Oct low) would shift focus to $29.705 (61.8% retracement of the leg up from 26.524 to $34.853). A minor intervening chart point is noted at $29.850.

Former support at $30.903/921 marks initial resistance. More substantial resistance is defined by yesterday's high at $31.503, which corresponds closely with the 50-day moving average. The halfway-back point of the decline thus far is well protected at $32.540.


Peter A. Grant
Vice President, Senior Metals Strategist
Zaner Metals LLC
Tornado Precious Metals Solutions by Zaner
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