For most of 2018 no one wanted it and those that owned it; couldn’t wait to get rid of it, but
since the beginning of December last year the yellow metal has been back in high demand.
The price has risen from levels around $1200, to straddle $1300 an ounce as of the close last
Friday where it ended the week just above $1305 an ounce. To get a better indication of
that price action please take a look at the chart below where you can see just how that
rebound has unfolded over the past couple of months.
Gold has been and always will be sensitive to the cost of owning it, so that means when
interest rates rise, its allure fades, remembering that owning gold pays you nothing, no
coupon or dividend. Furthermore, there’s also a storage cost to consider too, unless its in
coins or bars under your bed! On the plus side gold is, and probably always will be, a ‘safe
haven’ investment. So, when risk aversion takes a grip as it most certainly did in the final
couple of months of last year, then gold attracts some of the capital that doesn’t find its way
back into pure cash.
However, as I just mentioned, gold was not a popular asset to hold for most of 2018 with
the Fed pushing US interest rates higher. It was unsurprising therefore that the metal should
have been shunned when 10year US yields lifted to 3.25%. More recently though, with US
bond yields falling back quite dramatically (US 10year yield currently at 2.75%) coupled with
the sell off in global equities in December, the demand for gold increased, leading us back to above that $1300 level.
There are other drivers at work here when it comes to demand for the metal, not least its
close correlations with the JPY and the USD, but I am not going to touch on those today.
Now, in regards to US interest rates, the US FOMC is due to cast their latest monetary policy
decision at 7pm on Wednesday. No one really expects any changes this time around
especially given the most recent ‘dovish’ rhetoric from Powell and his colleagues at the Fed.
Given this backdrop perhaps its is of little surprise that gold is still pushing higher even
though the global equity market backdrop is more benign than it was in December. Maybe
gold is ahead of the curve in that respect? However, any inkling that the Fed is still looking
past the most recent events and those gold buyers of recent weeks might start to off load
again- we shall see.
Elsewhere this week it's another big week for UK politics and the pound. The recent rise to
above 1.3200 for the GBPUSD at the end of last week does seem to have run into some
profit taking ahead of another important technical level- this time it’s the 50week moving
average, coming in now at 1.3226 this morning which appears to be attracting fresh selling
interest. The GBPEUR appears to have also run into some selling resistance around 1.16 for
now too, but as with the GBPUSD; the latest upside move was largely predicated by a ‘short
squeeze,’ on the basis that the UK will not leave the EU on 29th March with no deal.
As to what finally emerges; it’s as much in the air as it ever was as far as I can see, so of
course this latest sterling rebound is subject to an immediate volte face should the news
warrant it. From a personal perspective I have hedged some of those dollar liabilities as I
said I would and like others I suspect; I will now wait before making a decision on any
further action.
Beyond the UK it’s potentially a busy week this week with the US Federal Reserve's policy
decision, GDP and unemployment reports highlighting the agenda. Outside of what the US
central bank doesn’t deliver this week, its worth remembering that the US unemployment
data could have been impacted significantly by the recent government shutdown.
The one non UK and US event/release that certainly has my full attention this week will be
the latest Chinese manufacturing PMI number (due out at 1am on 2/2) because that could
set the immediate tone for the equity markets and risk either way, especially if there’s
further evidence that Chinese output is continuing to contract. Below is list of the main
releases due this week.
Important Economic releases due this week
28/1- 2pm- ECB’s Mario Draghi addresses EU parliament in Brussels
29/1- 3pm- US January consumer confidence index
30/1- 12.30am- Australian Q4 CPI inflation report
30/1-1.15pm- US ADP January private payroll report
30/1- 1.30pm- US Q4 2018 GDP (expected lower- at 2.6% from earlier 3.4% estimate)
30/1- 7pm- US FOMC monetary policy decision (expected unchanged)
30/1- 7.30pm- US FOMC post monetary policy decision press conference
1/2- 1.00am- Chinese January manufacturing PMI
1/2- 10am- Eurozone Q4 2018 GDP estimate (expected unchanged at 0.2%)
1/2- 1.30pm- Canadian December annualised GDP estimate
2/2- 10am- Eurozone January CPI inflation report
2/2- 1.30pm- US January non farm payrolls and monthly job report
2/2- 3pm- US January ISM manufacturing index