Gold Price, Bonds And The USD

September 10, 2019

New York (Sept 10)  Gold is a unique asset that acts very similar to currency markets since it correlates to various assets, but over time it is most closely tied to the underlying movement of the US Dollar and real interest rates.

Given how easy markets sliced through USD1,500/oz maybe and just maybe Gold is showing the first signs of stalling out after a relentless summer long rally. Moreover, as painful as this may sound to Gold bulls, it seems the time to start trading Gold form the short side might finally be upon us as the US-China trade talks seem to be sinking in this morning.

The primary catalyst for Gold sell-off occurred last Thursday after the US-China trade talk headlines hit gold markets with a resounding thud. So, trade war should continue to be the primary driver of gold sentiment.

However, in the meantime, today's position purge is occurring on the back of higher bond yields and lower equity markets. Suggesting the sell-off has little to do with "risk-on” or asset rotation into growth assets, seems to be a common analyst mantra, as if that were the case equity market would not be languishing at intraday lows.

US Bond yields have remained firm during today's Asia session and are back on the rise while the USD has traded firm versus the EUR/USD. Both negative for Gold

So, with hard Brexit coming off the boil, an apparent period on trade war neutrality setting in, bond yields moving higher and the dollar trading firm, all of which are providing sound reasons why parabolics have now flipped to selling Gold.

There is still a lot arguing for higher prices, but the chatter around the gold markets, both physical and futures are far more mixed than at any time in recent months.

Gold may look to the ECB for some relief hoping the ECB will come through with a policy bazooka, but if they underwhelm this week, the Gold sell-off could extend further.

It's not just Bunds, and UST's yields that are moving higher on pre-ECB position taking JGBs continue to bear steepening also; as 30y has been sold 16.bp + since Thursday, ahead of key central bank meetings.

With the rapid rise in yields, investors seem to be waiting to decide when to buy. While I'm sure many investors still want to purchase super long dates on dips; they may be less aggressive ahead of the ECB and FOMC and BoJ policy meetings so as the steepening pressures pile on, Gold demand wanes.

My view is that G-7 central banks are looking for any excuse to walk back from the cliff edge of rate cut mania, like what the Bank of Canada did last week when they threw cold water on aggressive rate cuts. If this does play out as I think it will weigh significantly on the Gold market near term fortunes

The Euro

There seems to be a reality check of sorts unfolding that the ECB might not deliver on the market’s dovish expectations.

However, over the course of the next week or so I do expect the EURUSD to rise while getting bumped along gradually by a continuation of pricing out of hard Brexit risks.

Be forewarned the grind higher is probably going to feel like trudging through molasses into the 1.1100 ceilings.

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