Nicholas Frappell reviews the market performance of gold in May in the first part of ABC Bullion’s precious metals review for the month.
May started trading with the gold price almost touching the long-term resistance that has thwarted its attempts to break higher in 2016.
The first moves of the month were a dramatic slide lower as speculative longs liquidated and the price dropped to technical support at the Monthly Standard line at $US1211.
The price then rallied sharply higher back to the monthly opening price in a powerful rejection of the initially bearish price action.
CME Managed Money gold futures had reached 20.74 million Ftozs in gross speculative length by the April 25 data point, the highest level of commitment seen since early November last year – failure to break higher was certain to lead to disappointment selling.
The managed money sector experienced 5.598 million Ftozs of long liquidation between the May 2-16. Managed Money shorts grew by 1.451 million Ftozs over the same period, a period during which the active month traded at a VWAP (volume-weighted average) of $US1234.98.
The period after May 16 showed buyers returning in style, with Managed Money longs buying 2.979 million Tozs over the course of the next week.
In the ETF sector, gold picked up a small amount of buying during the fast half of the month as ETF investors showed indifference to price weakness.
Weakness in the price was driven by several factors, with a recovery in the dollar index damaging gold.
Tensions surrounding North Korea eased somewhat. In Europe, Macron’s win in France, and Marine Le Pen’s subsequent repudiation of the Front National’s anti-Euro policy contained the hint that the disruptive political forces at work in 2016 don’t chime with enough voters this year.
This removed a positive spin for gold – the possibility of a Le Pen contained some genuine room for uncertainty – and more or less marked the low for gold in May, before events in the US helped gold to rally shortly afterwards.
Expectations of a June rate rise increased from about 70 per cent at the end of April to 100 per cent by the second week of May, before declining to about 83 per cent by May 16 – almost a racing certainty, but enough to reflect concern that the Fed was not set to tighten as aggressively as had been thought.
The proximate cause was intimately bound together with the sense that the Trump Administration lacks the political weight and nous to drive forward its expansionist fiscal and tax reduction plans.
Former acting Attorney-General Sally Yates testified to the Senate that the White House knew of former National Security Advisor Michael Flynn’s vulnerability to Russian blackmail for over a fortnight prior to his dismissal.
The following week, the Director of the FBI, James Comey was sacked, in a move that reminded some of Nixon’s disastrous firing of Archibald Cox as the then-President tried to avoid disclosure over the ‘Watergate’ scandal.
Subsequent events suggest that Comey’s sacking is not quite as electrifying an event, but nonetheless, even some Republican politicians have raised the possibility of impeachment, although that remains a fringe idea in Congress so far.
What that means for gold is a weaker fiscal boost from a President struggling to get his program through Congress, a weaker dollar, and a central bank less defensive about rates ‘normalisation’ in turn.
The month ended with markets satisfied that the Fed will tighten in June, but pricing in a Fed policy that markets estimate at around 0.10 per cent looser than the situation at the end of April.
US 10-year bonds have strengthened, with yields moving from a high of 2.421 per cent on the May 11 to a low of 2.179 per cent on May 18 as weaker data become apparent through the month.
Housing starts, building permits and new home sales all showed weakness, in contrast to the decent employment data from the first half of the month.
The strong positive correlation between Yen performance and gold also persisted this month, as the mid-month rally in the Yen unfolded, with investors using both gold and JPY as safe-haven assets.
China had a strong first quarter, with World Gold Council figures estimating around 106Mt of bar and coin demand. Stripping out seasonal factors, there is every reason to suspect that Chinese gold demand remained firm in May, with new ways to trade gold over social networking platforms and concerns over other Chinese asset markets such as real estate, helped by Moody’s downgrading China’s debt on May 24.
Price targets for gold suggest a return to $US1297 and $US1328, with support at $US1244 and $US1228. Resistance lies at $US1285 and $US1301. At $US1260 spot, the implied probability of the price moving to $US1300 or better by early September is about one in three.
Nicholas Frappell is general manager at ABC Bullion