Nicholas Frappell reviews the market performance of gold in the June quarter in the first part of ABC Bullion’s precious metals review for the three-month period.
Gold started the June quarter with a rally towards the key resistance line that has thwarted the precious metal for the past year, as investors rebuilt positions on the CME through May and via gold ETF holdings up to May.
The price eventually rallied as far as the base of the Monthly Ichimoku cloud before falling away sharply. This area of resistance was mentioned as a key resistance for gold, even if the price made it above the resistance line, and so it proved.
The quarter ended on a weak note after what looked like a chance for a bullish resolution in May and June.
Gold is in a channel defined by safe haven flows on one hand (North Korea and other uncertainties) and a rising real rates environment (Fed, and a sharp fall in crude with a commensurate flow-through on wholesale prices).
In April, gold opened the quarter just above the monthly turning line on gold after an impressive finish in March, which saw spot gold rally $US54 off the lows to close at the monthly open.
The price didn’t challenge downtrend resistance but closed strongly, with managed money futures adding 5.60 million fine troy ounces (Ftoz) to the gross longs.
Shorts took back slightly less than a million Ftoz over this period – much short-covering had already taken place at the end of March, and in historic terms, shorts had relatively conservative positioning at around 5.983 million Ftoz at the last reporting day of the month.
Gold ETFs started the month long, 64.4 million Ftoz globally (source: Bloomberg), and added about 2 million Ftoz during the month.
News from the Federal Open Market Committee (FOMC) minutes released near the start of April indicated the Federal Reserve had voted nine-to-one to raise rates in March, and contemplated balance sheet reduction later in the year, perhaps earlier than expected, along with a view that equities were perhaps overvalued by conventional metrics.
The market appeared to have discounted that view entirely as the price continued to move steadily higher through the month, reaching a peak at $US1295 basis spot.
May was a different story: strong producer price data and signs of a strong labour market halted the decline of the dollar index (DXY) in the first half of the month. Ten-year US Treasury yields moved sharply higher to hit 2.42 per cent, bumping into overhead resistance at the Daily Cloud base, and challenging the March highs.
All this took gold lower to a monthly low of $US1214 on May 9, before climbing steadily back to reach a high near the end of the month at $US1274 spot, after two failed attempts to break past the 61.80 per cent retracement of the April high-May low decline.
CME futures activity in May saw a reduction in gross longs from 20.74 million at the last CFTC report on April 25 down to 17.53 million Tozs on May 30.
The low in gold on May 9 also coincided with President Trump firing FBI Director James Comey, a decision that looked like immediately haunting the US administration, as a clumsy attempt to divert pressure away from supposed links with Russia managed to swing the spotlight back to that very topic, and the vexed matter of whether the President was actively engaged in obstructing justice.
The Dollar did weaken right away on the not unreasonable view that an unpredictable President had just made getting a pro-growth agenda through Congress even harder than before – this helped propel gold to a close just short of the highs.
June saw gold continue the rally, breaking north of the key resistance line that extends back to September 2011 – depending on the thickness of the pencil you use, to some extent – but the price stopped right at the base of the monthly Ichimoku cloud.
Again, this is the sort of indicator that you are unlikely to see used often as observers tend to stick with daily and weekly timeframes, but it always helps to step back now and again to look at what is going on a very long-term timeframe.
Sure enough, the price retreated after the first touch to close beneath the trend line, perhaps setting the stage for the sudden weakness seen at the beginning of July.
June saw another reduction in CME gross managed money longs, and an increase in gross shorts, from 5.12 at the end of May to 7.19 million Ftozs by the last data point, June 27.
The end of the quarter showed hints that the market in South East Asia for physical gold was firming slightly, with more demand noted in Singapore and Bangkok.
That may reflect the knock on and continuation of stronger demand in India through the first quarter (imports were reported at 370Mt for the year through to April basis data collected by Metals Focus).
Anecdotally, there were some reports of fewer secondary bars circulating in those markets. Hong Kong physical demand remains fairly indifferent, with plenty of supply noted.
Again, gold hasn’t done ‘enough’ to make a persuasive case, although it has broadly speaking managed to cope with a background of rising rate expectations and central bank balance sheet reduction later this year, aided by a reduction in expectations for a Trump dollar boom.
Additionally, expectations about further political fragmentation in Europe have so far failed to materialise as Emmanuel Macron gained a commanding lead in France.
The UK election – a stunning reversal of expectations for Theresa May, which would be flat-out hilarious if it didn’t place an opposition party with a bizarre admiration for Venezuelan economic policy several steps closer to power – gave out mixed signals that could in general be interpreted as a rejection of ‘hard Brexit’ even if Labour has equivocated all along the way.
North Korea may or may not be a factor in gold’s strength, and so far tensions have not been ratcheted up sufficiently for evidence of a wholesale rush to gold. If tensions signal broad-based weakness in Asian currencies, gold is likely to benefit.
Looking ahead, downside targets certainly allow for further significant drops towards the $US1180 and $US1167 level, however shorter-term the market looks capable of cycling back towards US$1259, notwithstanding resistance at $US1234-36.
The current level is fairly key if expectations for another assault on $US1300 and higher are to remain in place.